Effect of 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 macro-economic factors on stock market returns at the NSE. The independent variable were money supply as measured by natural logarithm of M2 on a quarterly basis, 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, balance of payments as measured by percentage change in exports minus imports on a quarterly basis 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 All 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 0.774 which means that about 77.4 percent of the variation in stock market returns at the NSE can be explained by the five selected independent variables while 22.6 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=0.880). ANOVA results show that the F statistic was significant at 5% level with an F statistic of 18.826. Therefore the model was fit to explain stock market returns at the NSE. The results further revealed that individually balance of payments, economic growth, exchange rates and inflation are statistically insignificant determinants of stock market returns at the NSE while interest rate and money supply are significant determiner of stock market returns. This study recommended that policy makers should pay attention to the prevailing interest rate levels and money supply levels as they significantly affect stock market returns recorded at the Nairobi Securities Exchange