Effect of volatility of the underlying spot market on depth of the nascent kenyan derivatives market

Derivatives market in Kenya is at its nascent stage which raises doubt on its depth in boththe short term and long term. NSE kicked off futures trading on 4th July 2019 which ischaracterized by very low volumes, a clear indication of shallow market which is at itsnascent stage. The study identified single stock futures and equity index futures as theinstruments traded in derivatives market in Kenya. The study explored the effect ofvolatility of the underlying spot market on the depth of the nascent derivative market inKenya. The study used Nairobi Security Exchange price list and contracts data ranging from4th July 2018 to 31st January 2020. The study employed descriptive statistics and inferentialstatistics namely granger causality tests, Johansen Cointegration and Autoregressivedistributed lags using Stata version 16. The results revealed that volatility of the underlyingspot market has a negative but statistically insignificant effect on single stock futures marketdepth. However, volatility of the underlying spot market has a positive but statisticallyinsignificant effect on equity index futures market depth. The study concluded that atnascent stage, volatility does not affect the derivatives market depth. Therefore, CapitalMarkets Authority and Nairobi Security Exchange should focus on other factors that canaccelerate the derivatives market depth such as introduction of new derivatives products.