Relationship Between Macroeconomic Variables and Stock Market Returns at Nairobi Securities Exchange

Abstract

The objective of the study was to determine the relationship between selected macroeconomic variables and stock market returns at Nairobi Securities Exchange. It also aimed at reviewing the increasing body of theoretical and empirical studies that have endeavored to examine the range of magnitude and effects of macro-economic variables on the stock market returns at the Nairobi Securities Exchange.The study employed a causal research design. The target population was all the listed sixty seven firms at theNairobi Securities Exchange; the sample was represented by the NSE 20 Share Index. Secondary sources of data were employed, and data was collected on; the average treasury bill rate, money supply, the inflation rates, the GDP, the exchange rates, and the NSE 20 Share Index. The unit period of analysis was quarterly, and data was collected for the period from October 2008 to September 2018. The period comprised of 40 quarters. The study applied Granger causality tests, correlation analysis and multiple linear regression equation with the technique of estimation being Ordinary Least Squares (OLS) so as to establish the relationship of the macro-economic variables and stock market returns.The study findings were that the Granger causality test found no causality between stock market returns and the macro-economic variables employed in the study. The study also found out that a significant negative association exists between inflation and the stock market returns when correlation and linear regression analysis were conducted. However, the model developed in the study was found to be insignificant hence, it cannot be used to forecast stock market returns. The study concluded that inflation has a significant negative effect on stock market returns.The study recommended that; the governments through its various arms can device methods of influencing and stimulating the stock market. Investment banks, stock brokerage firms, institutional investors, and individual investors, can try the strategy of investing in the stock market when they anticipate a decrease in inflation because the returns are likely to increase during the period.