The Impact of Macroeconomic Variables on the Performance of the Nairobi Securities Exchange

Abstract

A number of macroeconomic variables such as changes in interest rate, inflation rates, and economic growth are believed to affect how stocks perform. The macroeconomic approach attempts to examine the sensitivity of stock prices to changes in macroeconomic variables. Under this approach, stock prices are influenced by changes in money supply, interest rate, inflation and other macroeconomic variables. This study sought to examine the impacts of macroeconomic variables on stock market performance in the NSE. The study used a descriptive research design. The population of this study comprised all the 59 listed companies in the Nairobi Securities Exchange as at 30th June 2012. In this study secondary data was used to investigate the relationship between independent and dependent variables. The data was analysed using descriptive analysis, correlation analysis and regression analysis. The study found that there was a general rise in share prices, money supply, exchange rate, inflation, and interest rate over the period under study. The study also found that money supply and inflation rate had positive but insignificant effects on share prices while interest rate had a negative but insignificant effect on share prices. Further, exchange rate has a negative and significant effect on share prices. The variables jointly accounted for 95.6% of the variance in share prices. The F statistic was also significant suggesting that the model was fit to explain the determinants of share prices. The study concludes that exchange rate has a significant negative impact on stock market performance. vi The study recommends that in order for the stock market performance in Kenya to improve, there is need for the Government to initiate measures that will control the exchange rate in Kenya. The study also recommends that there is also need for the Government to control the broad money supply in Kenya as there is some evidence to suggest that higher money supply may lead to better stock market performance. The study further recommends that there is need for the government to initiate policies that will lower the interest rates in Kenya as lower interest rates may translate to higher stock market performance.