Relationship Between Commercial Paper Rates and Stock Market Returns at the Nairobi Securities Exchange

Abstract

This research looks at the relationship between commercial paper rates and stocks returns at the NSE. It draws upon mostly secondary sources including statistical bulletins by CMA, All share indexes and 20 share index from the NSE and published studies. The goal of the research project is to link the two variables and show their extent of correlation using the Kenya financial market. The first phase of the project involves creating a project proposal in the first 3 chapters. The final phase involves collection of data and analysis and then reporting. This is done to examine the connection between the variables. The anticipated outcome was that there is a positive relationship between the two variables. The findings may be useful in explaining why commercial papers are riot often used in Kenya. Kenya being a developing country and with an infant financial market compared to others like the US which are fully developed, its commercial paper market and stock markets are also at the development stage. Though there are a few firms that have issued commercial paper in Kenya, it is showing the same kind of relationship between commercial paper rates and stocks returns. Mostly commercial papers are used to finance short term projects like inventory and salaries payments and it is less risky than stocks because they can be asset backed and they have a short period to maturity. Commercial paper rates of return is set higher than the treasury bill rate because they are a bit risky than treasury bill which is a risk free instrument of investment. In order to find out the relationship between commercial paper rates and stocks returns in at NSE, 20 share and all share indexes were used to determine the rate of returns from the stocks. Quarterly rates were regressed to seek a correlation between the variables. The study covered a period of six years from 2007 to 2012. Regression model was used for analyzing the relationship, which was found to be highly positive and they do affect each other significantly. This depicted the expected results from the study which have been the results from other studies from other markets.