Effect of interest rates on security market prices in the nairobi securities exchange
Literature documents contradictory and inconclusive findings on the relationships between stock market prices and various macro-economic variables including interest rates. This time series study sought to establish the effect of interest rates on stock market prices at the Nairobi Stock exchange. Secondary data for this study especially on interest rates and stock market indices were collected for a period of 5 years from June 2009 up to June 2015. The study applied correlation and regression analysis and found that variations in the four variables namely lending rates, deposit rates, interest rate spreads and Treasury bill rates contribute to 32.6% of variations in the NSE 20 shares and 44.9% of variations in the NASI respectively. The study established that there was a significant relationship between lending rates, interest rate spreads, Treasury bill rates and term deposit rates with NSE 20 share index and NASI respectively. The study also, established that there is a positive relationship between NASI and lending rates as well as term deposit rates and a negative relationship between NASI and Treasury bill rates as well as interest rate spreads. Further, it was noted that NSE 20 had a positive relationship with term deposit rates as well as lending rates and negative relationship with interest rate spreads and Treasury bill rates. It is therefore recommended that government policy should focus on interest rates attributes to stimulate stock market activities and performance.