The Relationship Between Monetary Policy and Performance of the Nairobi Securities Exchange

Abstract

The aim of this descriptive and correlational study was to determine the relationship between monetary policy and performance of the Nairobi Securities Exchange. The Performance measure of the Nairobi Securities Exchange used was the NSE 20-Share Index which was regressed against the monetary policy instruments including 91-day Treasury bill rate, exchange rate (US dollar), money supply (M3), repo rate, cash ratio requirement (CRR) and Central Bank rate (CBR). The period of the study was six years from June 2006 to June 2012. The study period was relevant because one of the variables, Central Bank rate (CBR), was introduced in Kenya for the first time in June 2006 as the rate at which Central Bank of Kenya lends money to commercial banks through the overnight Lombard window. The study employed monthly secondary data which was obtained from the Central Bank of Kenya and Nairobi Securities Exchange. Data were analyzed using the Ordinary Least Square method which assumes linearity between the dependent variable and the independent variables and the analysis technique was multiple regression aided by research software „eviews‟ version 7. The study found that the monetary policy instruments jointly influenced the variation in the NSE 20-share index with a strong adjusted R2. Furthermore, the NSE 20-Share Index was found .The rest of the paper is organized as follows: chapter one covers introduction by addressing issues related to background of the study, statement of the problem, study objective and the significance of the study; chapter two focuses on literature review; chapter three is about the research methodology; chapter four covers data analysis, results and discussion; and lastly chapter five addresses summary, conclusion and recommendations.