Analysis of the relation between market capitalization and stock market indices at the NSE

Abstract

The objective of this study was to analyze the relation between market capitalization and stock market indices at Nairobi Stock Exchange (NSE). The various functions fulfilled by market indices make it important to assess their suitability as indicators of market performance alongside the market capitalization.The Nairobi Stock Exchange was used as the case study. The study employed time series analysis where E-views software was used to analyze the data to assess the relation among the variables. The study established that there exists a strong positive relationship between market capitalization and the NSE indices. However, the NSE-20-share index was found to be more significant in explaining most of the changes in the market capitalization than the NASI. This was mainly due to the nature and composition of the indices. Within that period of study, it was determined there was a very strong positive correlation between market capitalization and NASI and a rather moderate positive relationship between market capitalization and NSE 20 share index.