Selected Macroeconomic Variables and Stock Price Volatility at the Nairobi Securities Exchange

Abstract

Stock volatility is the effectual variations in price of shares which is characterized by big swings in price changes that makes it difficult to project he changes in these prices. The market crashes in the world have been characterized by high stock volatility which makes it a special factor that should be considered and understood by investors and interested parties. This study undertook to look at the effect of selected macroeconomic variables on the volatility of stock returns at the Nairobi stock exchange. The macroeconomic variables that were studied included economic growth, commercial banks’ interest rates, inflation rate, government expenditure and balance of payment position. The study collected secondary data from KNBS websites on macroeconomic variables, Trend Economics and from the NSE handbooks. Quarterly data was used for ten years from the year 2008 to 2018. A linear regression model was undertaken to analyze the data and determine whether there exist any significant effect of macroeconomic variables on stock volatility. Diagnostic tests were undertaken in order to test whether the variables conformed to the assumptions made by the regression model. Government expenditure however did not pass multicollinearity test and was therefore dropped from the regression model. The coefficient of determination which showed the strength of the model in predicting the dependent variable was 23.9% that showed a relatively weak model. The F test statistic showed that the effect of the independent variables on the dependent variable was significant as the p value was less than the alpha value. The F critical was less than the F calculated and therefore the analysis rejected the null hypothesis and concluded that there exists a statistically significant effect of selected macroeconomic variables on stock volatility. The relationship between economic growth and stock volatility was negative with the other macroeconomic variables exhibiting positive correlation between the variables on stock volatility.