The Relationship Between Interest Rates and Share Prices of Commercial Banks Listed at the Nairobi Securities Exchange

Abstract

Interest rate is a proxy for financial prices for credit and affects resource allocation, production levels, prices and profitability. Thus, the relation between stock market and macroeconomic factors like interest rates has attracted interest in the past; whether from practitioners, researchers or even investors due to their belief that stock market enhances or drives the growth of an economy. Thus, this study sought to examine the relation between interest rates and share prices of commercial banks listed at NSE. A descriptive research design was adopted for this study. Population of this study entailed 10 commercial banks listed at NSE. This study used secondary data of commercial banks listed at NSE. This study used three models among them the Augmented Dickey Fuller (ADF) model, the Granger Causality Test (GCT) and finally linear regression model. ADF unit root found that time series had a unit root test and time series variables were stable. GCT found that interest rates do not granger cause share prices while share price does not granger cause interest rates. The study concluded that interest rates do not granger cause share prices while share prices do not granger cause share prices. The study also concluded that an increase in interest rates, exchange rates, inflation rates and decrease in dividend payout decreases share prices of listed Kenyan banks. The study recommended that banks management should come up with effective policies on interest rates since the study found that interest rates adversely affect share prices of listed banks.