Relationship Between Macroeconomic Variables and Market Returns of Firms Listed at the Nairobi Securities Exchange

Abstract

Macro economic variables have been cited as a predictor of variations in the stock market; however, several theoretical and empirical deviations have been informed on the direction and sign of causality in economies which are advanced financially. Macro economic determinant sought to be a measure standard for investors predicting a firm’s performance along with a proper alternative to acquire further information on the stock market behavior. The study aim was to identify the link between macroeconomic variables and market returns of NSE listed companies. This study focused on the arbitrage pricing theory, the capital assets pricing model and modern portfolio theory as the key theories guiding the study. The research undertook a descriptive research design and carried out a census of the 64 firms and obtained quarterly secondary data from all the firms for a 10-yearperiod between 2007 and 2016. The sourced information was entered into an excel work sheet and then analyzed by the descriptive statistical techniques, pooled regression and correlation techniques. The study results revealed that consumer price index had a positive and insignificant relationship with market returns while gross domestic product obtained an insignificant and positive link with the market returns of listed firms in Kenya. The findings further revealed that market returns and exchange rate obtained a negative and significant relationship whereas the relationship between money supply was significant and positive. Lastly, the outcomes established that the link between interest rates and market returns of companies listed at the NSE was negative and significant. The study concluded that market returns of the listed firms are significantly influenced by money supply,rates of interest and rates of exchange. It was recommended that the government of Kenya and the central bank should institute measures to control interest rates and exchange rates fluctuations.