The effect of inflation and money supply on the Returns of firms listed at the Nairobi securities Exchange
Abstract
Changes in the macroeconomic environment have affected the returns of firms listed on
the Nairobi Securities Exchange for a long time. Knowledge of the variability of stock
returns in regard to macro economic factors is imperative for both investors and policy
actors. The stock market returns of listed firms are usually contained in their respective
securities' prices and these prices are affected by inflation and money supply. This study
is set to establish the effect of inflation and money supply on the returns of firms listed at
the Nairobi Securities Exchange. The study adopted correlation study design and monthly
empirical time series data to analyze and describe the effect of inflation and money
supply on the returns of firms listed at Nairobi Securities Exchange. Secondary data on
consumer price index, money supply and Nairobi Securities Exchange all share index
(NASI) was used to describe the relationship between the variables.
The study found out that Stock Market Returns seems to have decreased as a result of
increase in inflation meaning that the two variables have an inverse relationship. The
study found out that a unit increase in inflation leads to 2.741 decreases in Stock Market
Returns. On the other hand, it was found that Money Supply has a positive relationship
with Stock Market Returns. The study found out that a unit increase in Money Supply
leads to 0.054 increases in Stock Market Returns. The findings of this study show that
both Inflation and Money Supply explains only 36.1% of the change in Stock Market
Returns. This implies that the changes in Stock Market Returns are largely affected by
other factors other than the two. From the findings and conclusion it is recommend to the
policy makers of the government that it is necessary to put measures in place to contain
inflation which is ever increasing. This will not only help to cushion investors against
negative returns but it will also help to stabilize the economy.