European Scientific Journal February 2016 edition vol.12, No.4 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431 79 Stock Returns And Volatility İn An Emerging Equity Market. Evidence From Kenya David Ndwiga, MA Peter W Muriu, PhD School of Economics, University of Nairobi doi: 10.19044/esj.2016.v12n4p79 URL:http://dx.doi.org/10.19044/esj.2016.v12n4p79 Abstract This study investigates volatility pattern of Kenyan stock market based on time series data which consists of daily closing prices of NSE Index for the period 2 nd January 2001 to 31 st December 2014. The analysis has been done using both symmetric and asymmetric Generalized Autoregressive Conditional Heteroscedastic (GARCH) models. The study provides evidence for the existence of a positive and significant risk premium. Moreover, volatility shocks on daily returns at the stock market are transitory. We do not find any significant leverage effect. Introduction of the new regulations on foreign investors with a 25% minimum reserve of the issued share capital going to local investors (in 2002), introduction of live trading, cross listing in Uganda and Tanzania stock exchange (in 2006) and change in equity settlement cycle from T+4 to T+3 (in 2011) significantly reduce volatility clustering. The onset of US tapering increase the daily mean returns significantly while reducing conditional volatility. Keywords: Conditional volatility, GARCH models and leverage effect Introduction Why stock returns change over time still remains a puzzle ever since its first documentation by Schwert (1989). Emerging markets’ stock returns portray at least four distinguishing features; high sample average returns, low correlations with developed markets’ returns, more predictable returns and higher volatility (Bekaert and Wu, 2000). When stock price variability reaches extreme levels, the consequences can be adverse. First, if such volatility persists, firms are less able to use their available capital efficiently because of the need to reserve a larger percentage of cash-equivalent investments in order to re-assure lenders and regulators. Second, such volatility increases market-making risks and requires market intermediaries to charge more for their liquidity services,