Influence of Selected Macroeconomic Factors on Stock Market Performance in Kenya
Abstract
Stock markets are crucial in promoting growth and development of any country. However, several stock markets around the world continue to produce mixed results. The literature suggests that different variables are potentially important in explaining the variations in stock performance beyond a single market facto. Using the Nairobi Securities Exchange case, this research aimed to assess the macroeconomic factors influencing stock market performance in Kenya. The research was guided by four particular goals: to determine the impact of exchange rate on stock market performance in Kenya; to determine the impact of interest rate on stock market performance; to determine the impact of inflation on stock market performance and to determine the impact of money supply on stock market performance in Kenya. The literature was directed by the Arbitrage Pricing theory, the Capital Asset Pricing Model and the Theory of Efficient Market Hypothesis. A multivariate time series econometric design was adopted to establish the direction and magnitude of the relationships. The target population was the Nairobi Stock Exchange stock prices data and statistical data from Nairobi Securities Exchange, Central Bank of Kenya, and from Kenya National Bureau of Statistics. Average monthly Nairobi Securities Exchange All Share Price Index, Exchange rate of the Kenyan Shillings against the United States dollar, the Consumer Price Index, the Commercial bank lending rate and the broad Money supply were the data used for a period starting from 2008 to 2017. Diagnostic and model specification tests were performed on the data using E-Views version 7. The Hausman test showed that the random-effects model is suitable to be used for our study. The Normality test showed that the disturbance term was almost same as being normal. The series were found to be stationary at first difference and not at level. The data were treated of the serial correlation problem and suitable model was chosen. An unrestricted vector autoregressive model was used to model the relationship between the dependent variable and the explanatory variables. Results based on the VAR output were interpreted. The research discovered that the four independent variables represented by the adapted R2 explain 87.9 percent of the variation in the dependent variable. All the independent variables were shown to be statistically significant. The results of the regression revealed that lagged Exchange rates have a long run negative effect on the stock market performance as well as the Interest Rate and Inflation, but Money Supply showed to have a long run positive effect on the Stock Market performance in Kenya. The study recommends that Kenyan regulators should continue trying to find all possible means to adjust levels of the concerned macroeconomic factors (Exchange rates, Interest rates, Inflation and Money supply) in order to improve the performance of the Kenyan Stock Market. The study further suggested more research to be carried out in order to bring more knowledge to the literature by including more macroeconomic variables and an extended period of time or by using a different research design.
Keywords: Exchange Rate, Inflation, Interest Rate, Money Supply, Performance and Kenyan Stock Market
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