The impact of macro-economic risk on stock prices in Kenya, 2000-2005

Abstract

This document examines the impact of macroeconomic risk on stock prices in the Nairobi Stock Exchange (NSE). One important factor which affects the determination of prices and the growth of capital markets is macroeconomic risk. Following works done on advanced stock markets, this study seeks to investigate the impact of macroeconomic risk factors on stock returns in various industrial classification; financial and investment, commercial and services, and industrial and allied sectors under the NSE for the period January 2000 to December 2005. Using the arbitrage pricing methodology developed by Ross (1976) and Chen et al (1986), the study revealed that investors in the NSE considered three main macroeconomic risk factors in the short run. That is, money demand, exchange rate and the risk premium in the determination of the various industrial stock prices during the period under consideration.