Effects of Interest Rate Changes on Equity Returns at the Nairobi Securities Exchange

Abstract

The impact of monetary policy, such as the central bank interest rate changes, on banks' stock market returns has been a main concern for regulatory authorities, academic communities, investors and financial institutions listed in the stock exchange market. The unpredictability in interest changes is widely believed to be an important determinant of the equity returns of firms listed in the stock exchange.The relationship between equity returns and financial risk parameters, such as central bank interest rate changes, can provide financial managers and commercial banks’ regulators with additional information, including information on how to improve commercial banks’ stock market returns through better management of interest rates changes. The unpredictability in interest changes is widely believed to be an important determinant of the equity returns of firms listed in the stock exchange. Review investigated effects of interest rate changes on equity returns at Nairobi securities exchange. Independent variables were interest rate changes and the dependent variable was the NSE share index. Descriptive research design was utilized. Study used secondary data. The results of (ADF) found that the time series had a unit root. The granger causality test found that there was a causal relationship between interest rate changes and NSE Share Index but there was no causal relationship between NSE Share Index and interest rate changes. Review reached a conclusion that interest rates negatively and significantly affected stock market returns. The study recommended the government of Kenya should formulate policies on inflation, interest rates, money supply and exchange rates to ensure that they do not have adverse effects on stock market returns.