The Relationship Between Selected Macroeconomic Variables and Stock Market Volatility of Firms Listed in Nairobi Securities Exchange

Abstract

The economic development of any nation is affected significantly by, among many other factors, the market for stocks. This is because of the mediation role the market plays between investors and borrowers of funds. The economic development of a country exhibited through a well-functioning stock market is enhanced significantly by enhancing savings and providing an effective way of allocation of resources (Junkin, 2012). A securities exchange play an intermediary financial role by providing access to capital and liquidity to companies by assisting in raising equity and debt capital, creating a platform for a secondary market for the trading of listed securities, and promoting efficiency in the mobilization, formation, and allocation of capital. Volatility in the market is the rapid movement up or down of the prices of shares. Market volatility is fundamentally caused by movements or changes in general economic factors referred to as macroeconomic variables. Such include GDP growth rate, rate of exchange, rate of inflation, interest rate of interest, supply of money, Government bond rates and balance of trade/balance of payments. Volatility may also be caused by speculative and sentimental considerations. The volatility in stock prices pose great uncertainty to investors, regulators, stakeholders, and financial economists. The undue unpredictability of the prices often poses a challenge in the efficient performance of the financial markets and may cause investors to make alternate investing decisions where they would consider moving their assets to risk-free investments rather than investing in riskier investments The stock markets have gained prominence in the finance discipline of risk diversification and funds mobilization, and alternative sources of capital for investment, growth, and socioeconomic development. Investment is guided by the perceived risk profile, which is subject to certain value drivers. An understanding of the dynamic behavior of stock markets is such important for investors, makers of policy, macroeconomists, and market analysts.. This study seeks to establish how these factors influence the volatility of returns of firms trading in Nairobi securities exchange, and recommend measures that may build more knowledge and confidence in the stock markets.