Selected macroeconomic variables and stock market volatility: evidence from the Nairobi securities exchange

Abstract

Both theoretical and empirical literatures posit that the thriving of a nation is directly associated with macro-economic variables like unemployment, GDP, inflation, remittances, money supply, interest and exchange rates. Share price movements are influenced by variations in economic fundamentals and these fundamentals’ affect future prospects. The study objective was to determining how selected macro-economic variables influence stock market volatility at the NSE. The predictor variables were economic growth, interest rates, exchange rates, inflation rates, money supply and external debt. Stock market volatility was the response variable that the study intended to explore and it was given by standard deviation of Nairobi All Share Index (NASI) on a quarterly basis. A ten year period (2010-2019) was chosen for the study and the quarterly data from the period collected from a secondary source. A descriptive design was chosen and analysis was made using the multiple linear regression model to determine how the selected variables relate. SPSS version 23 was utilized for analysis. From the results from the software used, the R-square value was 0.962 which can be translated to mean that 96.2% of the variations in stock market volatility at the NSE are attributable to the six selected independent variables and the 3.8 percent remainder are attributable to other factors beyond the scope of this research. The study also revealed a strong connection of predictor variables and stock market volatility (R=0.981). ANOVA results at 5% significance level show an F statistic of 171.468 hence the model was found appropriate in explaining stock market volatility at the NSE. Additionally, the results showed that individually, interest rate, inflation rate, economic growth and money supply are statistically significant factors affecting stock market volatility while exchange rate and external debt do not substantially determine stock market volatility at the NSE. The recommendation made by the study was that more focus should be placed by policy makers to the current levels of interest rates, economic growth and inflation rates since they significantly influence stock market volatility measured at the NSE.