Relationship between stock market performance and economic performance in Kenya

Abstract

Stock markets play a significant role as market intermediaries by providing a link between savers and investors. This is made possible by a growing economy which requires additional financing from markets whereas savers have surplus funds for investments. However, for the economy to grow there is a need for a vibrant stock market. Few studies have been done in Kenya to establish the relationship between the stock market performance and economic performance. This study therefore seeks to establish the relationship between these two factors.

In order to do this, the research was designed as a causal study where relationships were tested. The population comprised of companies listed at the NSE while the sample size was the companies forming the NSE 20 Share Index. Secondary data collected from the Kenya Bureau of Statistics and the Central Bank was used in the study. Data was then analysed using descriptive analysis, correlation analysis and regression analysis.

The findings of the study are that there is no correlation between economic performance and stock market performance. There is however a strong negative correlation between stock market performance and inflation and a strong positive correlation between stock market performance and exchange rates. GDP was affected by interest rate and inflation. The study concludes that there is no significant relationship between stock market performance and economic performance. The study therefore recommends that there is need to develop policies aimed at improving contribution of the NSE to economic development.