Effect of Selected Macro Economic Factors on Stock Market Returns at the Nairobi Securities Exchange

Abstract

Presently, macroeconomic factors are considered an indispensable foundation and econometric in analyzing a country’s overall economic position. Extant research works have documented the effect of selected macroeconomic factors on various parts of the domestic economy. Still lacking is conclusive validation of how changes in macroeconomic factors affect stock market returns besides linking this evidence to specific sectors in the economy. This study sought to determine the effect of selected macro-economic variables on stock market returns at the NSE. The independent variables were economic growth as measured by GDP growth rate on a quarterly basis, exchange rates as measured by quarterly exchange rate between KSH and USD, inflation rates as measured by quarterly CPI and interest rates as measured by quarterly CBK lending rate. Stock market return was the dependent variable which the study sought to explain and it was measured by quarterly returns computed from the Nairobi 20 share index. Secondary data was collected for a period of 10 years (January 2008 to December 2017) on a quarterly basis. The study employed a descriptive research design and a multiple linear regression model was used to analyze the association between the variables. Statistical package for social sciences version 22 was used for data analysis purposes. The results of the study produced R-square value of 0.845 which means that about 84.5 percent of the variation in stock market returns at the NSE can be explained by the four selected independent variables while 15.5 percent in the variation was associated with other factors not covered in this research. The study also found that the independent variables had a strong correlation with stock market returns (R=0.919). ANOVA results show that the F statistic was significant at 5% level with an F statistic of 47.526. Therefore the model was fit to explain stock market returns at the NSE. The results further revealed that individually economic growth, exchange rates and inflation are statistically significant determinants of stock market returns at the NSE while interest rate is an insignificant determiner of stock market returns. This study recommended that policy makers should pay attention to the prevailing inflation, exchange rate and economic growth levels as they significantly affect stock market returns recorded at the Nairobi Securities Exchange. The study further recommended that future researchers should investigate other macro-economic variables that determine stock market returns at the NSE