The effects of interest rates volatility on stock returns: evidence from the Nairobi securities exchange

Abstract

The purpose of this study is to analyze the effects of interest rates volatility on stock returns in the Nairobi Securities Exchange. A descriptive design was used where monthly time series data for a period of 5 years from 2007 to 2011 was used. The Nairobi Securities Exchange 20 Share Index for the period January 2007 to December 2011 was obtained from the Nairobi securities exchange as well as the 91 Day Treasury bill rate was obtained from the Central Bank of Kenya. The data was then analyzed through the use of regression and correlation analysis to determine the effect and direction of the variables. Two GARCH (1,1) models were used for the purpose of investigating the effects of changes in interest rates on stock returns volatility. Model 1 is estimated without interest changes and Model 2 includes the interest rates for estimating conditional mean variance.