The Effect Of Selected Macro-Economic Variables On Trading Volumes At The Nairobi Securities Exchange

Abstract

The stock market is used to measure both the performance and economic stability of a nation. The rising stock market index is a sign of a growing economy and a declining and fluctuating stock market portrays economic instability. Both theory and empirical literatures hold that a country’s growth is directly linked to the size of the economy, which consists of a number of variables, inflation, interest rate and exchange rate. This study sought to determine the effect of selected macroeconomics variables on the stock trading volumes at the Nairobi Securities Exchange. The independent variables were interest rates as measured by average monthly lending rates, exchange rates as measured by monthly KSH/USD and inflation as measured by monthly CPI. Stock trading volume was the dependent variable which the study sought to explain and it was measured by monthly value of stocks traded in the stock market. The study employed a descriptive cross-sectional design and carried out a census of all the 64 firms listed at the NSE. The study revealed that exchange rate, interest rates and inflation rates in Kenya had been fluctuating during the study period (2007-2016). Regression analysis findings established that there was a strong relationship (R= 0.803) between selected macroeconomics variables and stock trading volumes. The result of the study also indicated that the value of adjusted R-squared is 0.635. This means that independent variables investigated in the study (exchange rates, interest rates and inflation rates) could account for or explain 63.5% of the dependent variable. The remaining 34.5% can be explained by other variables which were not the subject of this study. The study concludes that there is a strong relationship between the selected macroeconomic variables and stock trading volumes. The study also established that exchange rate and inflation rate negatively affects stock trading volumes while interest rate had a positive effect. The study recommends that the Capital market Authority and the national government of Kenya should come up with fiscal policies aimed at cushioning the stock market from high inflationary pressure. The study further established that an appreciation in a country’s currency increases the purchasing power of individuals leading to an increase in stock trading volumes. The study recommended that the government should put in place mechanisms aimed at enhancing exchange rate stability which in turn promotes stock market