Effect Of Inflation On Stock Market Returns At The Nairobi Securities Exchange

Abstract

Macroeconomic variables and policies can be harnessed to reinforce prosperity of the Kenyan economy. Empirically, firms cannot adjust production and output in the short run whereas consumers have more disposable income to spend. Prices adjust upwards to support increase in demand. A major shock in the economy for instance a natural disaster can affect availability of inputs and therefore impact production. The driving goal of the study is to investigate the effect of inflation on stock market returns of organization cited at the Nairobi Securities Exchange. A descriptive research design was prioritized in this assessment. The research sampled 19 companies from a population consists of the 66 firms that were listed in the NSE in December 2020. The sample consists of nineteen firms whose shares comprise of the NSE 20 index. The study relied on secondary sources of data. Monthly data on the Nairobi Securities Exchange's NSE 20-share index were collected. Moreover, SPSS was used to analyze the data collected. Regression analysis played pivotal part in examination of impact of explanatory variable on the explained variable. Tables were maximized to assess and coin the research findings. The diagnostic tests’ outcomes showed that all variables had its VIF values VIF˂10 and all its Tolerance values > 0.2. Thus implying that there was no multicollinearity existing between the Independent variables. The significance values in both the Kolmogorov-Smirnov in addition to Shapiro-Wilk test were less than the p value 0.05. This showed a normality distribution of data. This mandated the rejection of null hypothesis in striving towards a conclusive judgmental process. Durbin-Watson value obtained was 0.261 which is less than 2 thus lying within the normal range. From the comprehensive computation as stipulated R of 0.963 while R Square was 92.7%. This analysis posit that all the factors prioritized in this study amounted to 92.7% in deviating stock return. In summary, exchange rate, money supply, inflation CPI and interested rate represent 92.7% of all the contributors of deviation and variation in stock return. The study outcome stipulated that an addition of one unit of inflation CPI results in increment in stock market return by 0.3% if remnant variables are constantly maintained. A unit increment in the interest rates translates to 0.1% decrease in stock market returns whenever all variables are maintained constant. Additionally, an increase in money supply triggers 8.3% decrease in stock market returns if all factor are held constant. Furthermore, an addition of one unit of exchange rate translated to increase 50.4% increase in stock market return when all factors are kept constant. Moreover, the autonomous figures was 5.491. The research recommends the prudential policy formulation to protect against severe impact of inflation rate on the stock market return.