Relationship between capital market development and economic growth in Kenya

Abstract

The study was carried out on firms listed on the Nairobi Securities Exchange (NSE) with the intention of finding out how economic growth was affected by the developments in the level of market capitalization. This was out of the fact that most researches dwelt so much on the relationship between market capitalization and GDP. Regression model was used to study the relationship between economic growth and stock market development. The two variables were measured by percentage economic growth rate and market capitalization respectively. The data used were collected from the Nairobi Securities Exchange for the period spanning twelve years from 2000. The annual value of a listed firm’s capitalization was taken as reported in the financial records and such values added to get the total capitalization for that year. The data for economic growth for the same period was got from the database of the United Nations Statistics Department.Analysis of the data revealed that there was a 0.45 correlation between the two variables indicating that the two co-moved. The regression analysis found a weak positive relationship with the level of growth rate that is independent of market capitalization being 2.445 %. The variable part had a variation coefficient of 0.00003 which is positive. Both the regressed variables were statistically significant as was the whole regression as indicated by an F-statistic of 26.70679. However, the coefficient of determination was low, meaning that there was a large portion of the variation in growth rate that was not captured by the regression model. This was expected as economic growth is a result of many other variables in and out of the securities market.