EFFECT OF MACROECONOMIC VARIABLES ON STOCK MARKET RETURNS PERFORMANCE IN NAIROBI SECURITIES EXCHANGE, KENYA

Abstract

Stock market is a market that deals with the interest of stocks issued by publicly quoted companies and the government. Therefore, the nature and the state of a Stock market is of great concern to the government, investors and generally all the stake holders. The general objective of the study was to investigate the effect of macroeconomic variables on stock market performance in Nairobi Securities Exchange. The study sought to establish the influence foreign exchange rate, interest rate and inflation rate on stock market performance based on the weighted average monthly data from January 2005 to December 2015 for the companies listed on the Nairobi Securities Exchange in Kenya. The study utilized secondary data that was obtained from: CBK, KNBS and NSE. The study adopted descriptive statistics such as mean and standard deviation in the analysis of data. The secondary data was quantitative in nature (continuous data). The collected quantitative data was edited and coded and entered into a Stata version 14 for analysis. Both descriptive and inferential statistics was used to analyze the quantitative data. In descriptive statistics, the study used frequency distributions, mean, standard deviation and percentages. A multiple regression analysis was used to establish the relationship between the independent variables and the dependent variable. The study found that foreign exchange rate has a negative effect on stock market performance in Nairobi Securities Exchange. Over the years, the shilling has been unstable against the hard currencies of the world implying that even the foreign debts denominated in forex end up becoming a great burden on Kenyan economy. The study also found that interest rate has no significant effect on stock market performance in Nairobi Securities Exchange. In addition, the study found that inflation has a significant and negative effect on stock market performance in Nairobi Securities Exchange. The study recommends that the policy makers and the central bank of Kenya (CBK) should plan in advance and influence the macro-economic variables such as inflation by developing policies to minimize inflation. Inflation should be cubed as it negatively stock market performance. Although the government of Kenya managed to curb interest rates in commercial banks in Kenya, the same is no extended to further financial institutions such as microfinance institutions.