Determining the influence of macroeconomic Indicators on stock market Indicators

Abstract

This study sets out to determine the influence of the Macro-economic indicators on the Stock market indicators from a strictly investment perspective as well as to examine the role of the stock market in creating viable means to investment in the economy, The major theories under consideration in this study are the Capital Market Theory, Investment Theory, and Efficient Market hypothesis. The model of Canonical correlation analysis was found to be the best tool in analysing the two sets of indicators. It is superior to multiple regression analysis, since it allows for correlation of more than one Y variable with many X variables. Three Macro-economic indicators were considered suitable for gauging investment activity i.e. Interest (overdraft) rates, Treasury bill rates and Inflation rates. On the other hand three stock market indicators were seen as. optimal in their representation of stock market activity i.e. Stock market, Market CaPitalization .This study found that Macro-economic indicators do exert a significant level of influence on the Stock Market activity. Furthermore, this study found underlying perceptions of investors in the local market; such as their preoccupation with selected indicators. This study also sought to account for recent trends at the Nairobi Stock Exchange. This study recommends ~ strong and concerted effort by all stakeholders in policy formulation and implementation; that is directed towards promotion of an active capital market. However, to achieve economic growth, other inputs such as labour, technology, natural resources and management approach should be incorporated, since Finance alone will not lead to economic growth. The overall effect being to create a more stable macroeconomic environment, that results in a lower price of credit (risk) and ultimately improve investor confidence and economic growth. Further research in this area, should incorporate more variables into the model, to explain a higher level of variance. An inter-sectors study should be carried out to check for mis-allocation of resources and remedy the situation. This study may also be carried out annually to monitor trends to help in assessing improvements or the lack thereof.