Effect of Treasury bill rates on stock market returns of companies listed in the Nairobi securities exchange.
Abstract
A country’s monetary policy dictates the amount of cash available for government
expenditure or repayment of external debt. A reduction in money supply would trigger
open market operations that enables the government to obtain the cash that it requires and
one of the securities that can be used is Treasury Bills. Theoretically, Treasury bills are
considered lucrative for risk averse investors hence being a competing security to the
stock market. The aim of this paper was to understand the impact of Treasury bill rate on
stock return of companies listed in the NSE. The research design employed was
descriptive correlation design. Population was made up of companies trading at the NSE
for duration of 4 years (January 2015 to December 2018). A sample of 20 companies that
make up the NSE-20 index was purposively chosen and data used was secondary.
Multiple linear regression carried out on the data to comprehend the relation between the
variables. The study controlled for effect of exchange rates and inflation rate. Tests of
significance were carried out on the data. The study noted that Treasury bill rate had a
negative influence on stock market returns. Exchange rate was noted to have a positive
influence on stock market returns. It was also noted that inflation rate had a negative
effect on stock market returns. The coefficient of determination was found to be 24%.
Analysis of variance identified Treasury bill rate, exchange rate and inflation rate
collectively significantly influenced stock market returns at the 5% level of significance.
The study reached the conclusion that Treasury bill rate and stock market return for listed
firms are significantly inversely related and are competing investment products. It also
concluded that increases exchange rate caused stock returns to increase significantly.
Further, the study concluded that increase in inflation rate caused stock market returns to
decrease but the decrease was not significant. Finally it was concluded that variation in
T-bill rate, exchange rate and consumer price index explained 24% of the variation in
stock market return. The study recommended that investors and portfolio managers
should tilt their portfolio allocation towards stocks when there is an expectation of T-bill
rate to go down and toward T-bill when there is an expectation of T-bill rate to rise. The
study also recommended increasing exposure to the stock market when exchange rates
are rising as the stock market is expected to perform better in these periods. In addition
the study recommends selling of stocks when the inflation rate is expected to be rising to
avoid loss in expected returns. Finally, the study recommended higher T-bill rate by the
Central banks’ monetary policy when seeking to reduce liquidity in the market. Further
research may focus on investigating the mechanism through which Central Bank
monetary policy is transmitted to the stock market. Researchers may also seek to evaluate
the role of monetary policy in securities market development especially for developing
economies.
Publisher
UoN
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
- School of Business [1365]
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