The relationship between macroeconomic variables and sector-specific returns: case of companies qouted at the Nairobi stock exchange

Abstract

This study examines the impact of macroeconomic variables, world oil prices, Treasury bill rate and inflation on the performance of shares sector wise over the period 1996 to 2001. Data is obtained from NSE and other financial intermediaries. The purpose of this study is to investigate the relationship between sector-specific stock returns and the macroeconomic variables. Using the regression model, we begin by examining the average monthly market returns of the main investment market segment namely Agricultural, Commercial, Financial and Industrial market sectors Without considering the effects of macroeconomic variables under study. The analysis of the impact of the macroeconomic variables indicate that the greatest impact varies across the sectors. In the case of agricultural sector, it is the Treasury bill rate while in the commercial, financial and industrial sectors, it is inflation. Generally, the results are consistent with the belief that inflation and the world oil price have negative impact on the returns from the shares across sectors, Charles M. J. and Gautam K. (1996) and Driesprong, et al (2004). Shares at the NSE act as a good hedge against inflation. According to K won, Chung S (1997), inflation and interest rate-related variables are not significant factors to the Korean stock market. The implication is that the investors would not achieve much through diversification. Secondly the efficiency at the NSE might be low such that price differential across the sectors are unobservable. Finally the impact of these variables across the sectors might be uniform.