The effects of macroeconomic factors on the Nairobi security exchange stock returns.
Kamau, Emmanuel Mwangi
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The stock market assists a country development through boosting savings and efficient allocation of resources. It is an intermediary link between savers and borrowers accessing capital for investments. In addition, the stock market assists investors to diversify and hedge risks by holding an efficient portfolio. In an efficient stock market, stock prices should reflect all available information. This causes volatility of stock returns due fluctuation. Some of the causes of fluctuations are due to volatility of macroeconomic variables. Despite effort made by past studies to explain effects of money supply, inflation and interest rates on stock returns, controversy exists in their finding with counter argument being provided for each assertion. This study examined the effects of money supply, inflation and 91-Day Treasury Bill on stock returns. Monthly time series data from January 2006 to June 2014 was sourced from Central Bank of Kenya (CBK), Kenya National Bureau of Statistics (KNBS) and the Nairobi Security Exchange (NSE). Unit root test was conducted using ADF and PP test where stationarity was established. Three (3) cointegration equations were established by Johansen co integration test. The Vector Error Correction Model (VECM) was used. Based on empirical evidence, money supply, balance of payment, exchange rate and political uncertainty had no effect on stock returns in the Nairobi Security Exchange. The inflation and 91- Day Treasury Bill rate were negatively related and influenced stock returns. The result shows that one percentage change in inflation decreased stock returns by 9.34 per cent. Further, one percent change in 91-Day Treasury bill rate lead to a decrease of stock returns by 14.20 per cent. The speed of adjustment towards longrun equilibrium following a shock of macroeconomic variables is corrected by 73.90 per cent every month and it takes 1.4 months for disequilibrium to be corrected. Based on empirical evidence from the study, it was concluded that macroeconomic variables affect Nairobi Security Exchange returns. The variability of macroeconomic variables leads to volatility of stock returns. The study recommends need to put up policies that will lead to low and stable inflation and interest rates. The policy implication is that the government should put adequate policies to minimize fluctuations of macroeconomic variables. This will have an impact of reducing volatility of stock market returns.