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 (NASI) and goes further to determine whether changes in macroeconomic variables can be used to predict the future NASI. Three key macroeconomic variables are examined and they include lending interest rate, inflation rate and 91 day Treasury bill (T bill) rate. Secondary data for the periods March 2008 to March 2012 is collected as follows; data for NASI was obtained from the Nairobi Securities Exchange (NSE), data for inflation was obtained from Kenya National Bureau of Statistics and finally data for lending rates and 91-day T Bill was obtained from Central Bank of Kenya (CBK). The data is analysed using regression method. The lending rate is dropped from the regression model since it is correlated with the 91-Day T bill rate. The findings in the study indicate that 91 – day T bill rate has a negative relationship with the NASI while inflation has a weak positive relationship with the NASI. Based on these findings, the study recommends monitoring of the macroeconomic environment since the changes in the macroeconomic variables has an effect on the stock market performance, which also influences the foreign investor’s decisions in the local investments.