The Effect of Interest Rates Changes on Performance of the Nairobi Securities Exchange 20 Share Index
Abstract
The Central Bank interest rate encountered various changes between 2010 and
2012.These changes were attributed to efforts by the Monitery policy committee
(MPC) to strenghthen the Kenya shilling currency which was getting weaker against
major currencies in the world.The study therefore sought to examine if Interest rate
changes had an effect on the performance of the Nairobi securities Exchange 20 share
Index.The NSE 20 share index is a market-capitalization weighted index for the
Nairobi Securities Exchange which was used to represent the entire NSE popolation.
Event-study methodology was used to measure the magnitude of interest rates
changes on performance of the NSE 20 share index. The study was motivated by the
need to establish how fiscal tools used by the central bank affect the performance of
the NSE while trying to control other aspects of the economy like foreign Exchange
rates and inflation rates. Historical data on interest rates and NSE 20 Share Index was
obtained from the CBK weekly bulletin and NSE reports respectively for the period
January 2010 – Dec 2012. Abnormal returns and Cumulative abnormal returns were
calculated for 21 days event windows, 10 days before the event and 10 days after the
event. T-statistical test were also conducted to test significance of the abnormal
Returns (AR) and Cumulative abnormal returns (CAR).
The findings of the study indicate that interest rates changes had an effect on
performance of the NSE 20 share index. Interest rate hikes resulted to a decline in the
NSE 20 share index while Interest rate cuts resulted to a rise in the NSE 20 share
index.
Publisher
University of Nairobi