The effect of inflation and interest rates on stock market returns of firms listed at the Nairobi Securities Exchange
Abstract
Stock markets promote savings and investments by encouraging investors with surplus
funds to invest them in additional financial instruments that better matches their liquidity
preferences and risk appetite. The equity markets form a major component in the
financial sectors of developing countries such as Kenya, which underlines their potency
in contributing to economic growth and development. For investors, the bottom line is the
returns they earn from their investments in the equity markets. This study thus sought to
investigate the effect of inflation and interest rates on market returns at the Nairobi
Securities Exchange. Applying secondary data from the Nairobi Securities Exchange and
Central Bank of Kenya, this descriptive time series correlation study models monthly
market returns as the dependent variable and monthly inflation rates, monthly interest
rates, monthly spot exchange rates and month end market liquidity as the independent
variables in an ordinary least squares (OLS) regression model. The study suggests that
66.9% of variations in markets returns are explained by variations in the dependent
variables. The study establishes weak positive relationship between market liquidity and
market returns. Statistically significant negative relationship is found between Inflation
rates and market returns. There are also statistically significant positive relationship
between interest rates and market returns as well as between spot exchange rates and
market returns. The study thus recommends that policy makers should address any
policy gaps that exist on the exchange rate, interest rate and inflation rate management
which affects market returns and discourages investments at the bourse.
Publisher
University of Nairobi
Description
Thesis