Abstract
Purpose: This paper examined the effect of market depth on securities market volatility at the Nairobi Securities Exchange (NSE), Kenya. The analysis isolated the price-impact dimension of liquidity to determine whether changes in the market’s capacity to absorb order flow were associated with changes in GARCH-estimated volatility.
Methodology: The paper adopted a correlational quantitative design and used 2,334 daily market-level observations covering January 2017 to December 2025. Securities market volatility was generated from daily log returns of the NSE 20 Share Index using a GARCH(1,1) model. Market depth was operationalized through a daily price-impact measure based on Kyle’s lambda. The inverse hyperbolic sine transformation was used to reduce skewness and accommodate very small observations. Descriptive statistics, Pearson correlation, analysis of variance and simple linear regression were estimated using Stata 18.
Findings: Market depth had a positive and statistically significant relationship with securities market volatility. The Pearson correlation was r = 0.3550 (p < 0.001). The regression model was statistically significant, F(1, 2332) = 336.19, p < 0.001, with R-squared = 0.1260 and adjusted R-squared = 0.1256. Market depth had a positive coefficient of 8.1940 (SE = 0.4469, t = 18.34, p < 0.001). The result implies that higher price impact, which represents weaker effective depth, was associated with higher conditional volatility.
Unique Contribution to Theory, Practice and Policy: The paper extends Market Microstructure Theory by demonstrating that the price-impact dimension of liquidity is statistically relevant to volatility in an African emerging market. The findings support policies that strengthen liquidity provision, order-book transparency, market-making capacity and surveillance of counters where modest trading pressure generates disproportionate price movements.
Keywords: market depth; securities market volatility; Nairobi Securities Exchange; GARCH; Kyle’s lambda; market microstructure