The relationship between equity and bonds for firms listed at the Nairobi securities exchange
The objective of this study was to establish the relationship between yields on bonds and returns on equities at the NSE from January 2002 to September 2012. The study employed the NSE 20 share index and the yields on 1-year and 2-year bonds over the sample period. Data was analyzed for stationarity before applying correlation analysis and regression analysis. The results indicated that the NSE index is nonstationary and integrated of order one while yields on bonds were stationary. Hence, in this study yields on bonds were regressed on the differenced NSE-20 index series. The results show that there is a negative relationship between the growth rate in the NSE-20 index and the yields on bonds. However, there is a positive relationship between the differenced NSE-20 index growth rate and the yields on bonds. Further, yields exert a significant positive impact on the variability in the growth rate of the NSE-20 Index. In conclusion, holding bonds and equities in the same portfolio constitutes a good diversification strategy. First, the two assets are negatively correlated. Moreover, changes in bond yield tend to increase returns on equities. Thus, the benefits of holding bonds and equities in a portfolio are higher returns at a lower risk.