The Impact of Money Supply and Selected Macro Economic Variables on Stock Market Returns at the Nairobi Stock Exchange (Nse)

Abstract

The purpose of this study was to find out whether or not any meaningful relationship, both direct and indirect, exists between monetary activity (as embodied by money supply, interest rates and GDP) and stock market activity. The need for the study arose due to the increased activity at the Stock Market between the years 2002 to 2006 during which significant rise in both prices and volumes as reflected by gains in both the stock indices and the market capitalization was witnessed. Although the rise in stock prices was to an extent in tandem with earnings growth, there were instances where the general price level rose tremendously without any fundamental backing. Further, the rise in IPO activity led to an increased flow of funds into the stock market. Several studies have been done on the impact of various macroeconomic variables on stock market returns. However, studies such as that by Anokye and Tweneboah (2008) on the role of macroeconomic variables in determining stock market movement at the Ghana Stock Market did not take into account broad money supply aggregates, and another by Nyamute M.N. (1998) did not co-opt the indirect impact of economic output, as measured by GDP, on stock returns. This study therefore is more focused on capturing both the direct impact, if any, of money supply on stock returns and the indirect impact of interest rates and GDP growth trends on stock returns at the Nairobi Stock Exchange.