An empirical investigation of the relationship between selected macroeconomic variables and the Nairobi stock exchange-20 (NSE) share index

Abstract

This study investigates the relationship between stock market and some selected macroeconomic variables in Kenya. The study use NSE-20 share index to represent Kenya stock market and real GDP growth rate, inflation, interest and Treasury bill rates as macroeconomic variables. The relationship between the stock market index and the macroeconomic variables is analyzed using quarterly time series data covering the period 1999-2008. Summary statistics, correlation and regression analysis were employed to ascertain the relationships. Findings of the study reveal that macroeconomic variables explain about 70% of the variation of the market share index. The regression coefficients show that the market share index is positively related to Inflation rate, Treasury bill rate and Growth Domestic Product while it is negatively related to the Interest rate. With these results, it is important to highlight that there is the need to implement prudent macroeconomic policies in order for Kenya to derive maximum benefits from stock market. Policy-makers need to be careful too when trying to influence the economy through changes in macroeconomic variables such as the interest rate, treasury bills as this may inadvertently depress the stock market, and curtail capital formation which itself would lead to further slowdown of the economy