The relationship between macro economic variables and stock market performance in Kenya

Abstract

This study investigates the relationship between macroeconomic variables on NSE All share index and goes further to determine whether changes in macroeconomic variables can be used to predict the future NSE All Share Index. Three key macroeconomic variables have been examined and they include Lending Interest rate, Inflation Rate and 91 day T bill. Secondary data for the periods March 2008 to March 2012 was collected as follows; data for NASI was collected from NSE, data for Inflation was collected from Kenya National Bureau of Statistics and finally data for Lending Rates and 91-day T Bill was collected from CBK. The data was later analysed using regression method and analysed data presented. Lending rate was dropped from the regression model since it is correlated with the 91-Day T bill. The findings in the study indicate that 91 –day T bill has a negative relationship with the NSE All share Index while Inflation do have a weak positive relationship with the NASI index. Based on these findings, the study recommends strict monitoring of the macroeconomic environment since the changes in the macroeconomic variables has an effect in the stock market performance, which in return influence the foreign investor’s decisions in the local investments