The Effect of Selected Macro-economic Variables on the Stock Returns at the Nairobi Securities Exchange

Abstract

The Nairobi Securities Exchange provides a massive platform for corporate and individual investors alike. This paper investigated the effect of interest rates, the inflation rate, the foreign exchange rate and the World Price Index on the NSE-20 share index for a period from January 2010 to December 2017. A multiple regression of the APT style was run using the EViews software 9th edition. The results show that all the predictor variables under the observation jointly affect the movement of the NSE-20 share index. Precisely, these macroeconomic variables explain about 11.97% of fluctuations of the NSE-20 share index. This means that close to 88.03% of these fluctuations were explained by other factors that were not incorporated in this study. The local variables, i.e. the interest rates, the inflation rate, and the foreign exchange rate all had a negative impact on the NSE-20, with all the three variables having negative correlation coefficients with the NSE-20. The inflation rate has a more significant negative effect on the NSE-20 share index than the 90-day treasury bill interest rate and the foreign exchange rate. The WPI has a positive correlation with the NSE-20, meaning that the movement of this index is in line with the international macroeconomics. From the study findings it was concluded that it is possible to predict the current and the future stock price index values of companies listed in the Nairobi securities exchange by studying the past values of interest rates, inflation, exchange rates and world price index in Kenya. The study recommends the incorporation of more macro variables in further studies so as to bridge the 88.03% gap explained by fluctuations in predictor variables such as GDP, money supply etc. that were not factored in this study.