Analysis of the determinants of stock price volatility at Nairobi Securities Exchange

Abstract

Most studies on the effect of macroeconomic variables on stock markets however seem focused on developed markets. Though in recent times, substantial amount of research is also emerging on macroeconomic volatility and stock markets in African markets. From the literature and empirical evidence review it is still not clear on the direction of the relationship between exchange rates, interest rates, and inflation and stock prices. Most of the studies done in Kenya previously considered two variables and used quarterly data. This study used four variables and considered monthly data on interest rate, inflation, exchange rate and stock price to examine the relationship between interest rate, exchange rate, inflation and stock price volatility in the NSE. The study made used monthly data spanning from January2003 to December 2013. The data was obtained from various sources. Data on interest rates and the exchange rates was obtained from the Central Bank of Kenya. Data on inflation was obtained from Kenya National Bureau of Statistics. The NSE 20 Share Index was obtained from Nairobi Securities Exchange. Regression analysis and descriptive statistics were used to determine the relationship between inflation, interest rates, exchange rates and stock price volatility. From the findings, the coefficients on Interest rate was -34.818, exchange rate was -119.475 and the coeficient for inflation was 32.204. These findings mean that a unit change in inflation rate leads to an increase in stock price. In addition a unit change in Interest rates leads to a decrease in stock price, while a unit change in exchange rate results to a decrease in stock price.