The relationship between capital market returns and economic growth in Kenya

Abstract

The relationship between the economic growth and the stock market return has been an important issue in the global arena, where investors are seeking to invest in countries that will yield best returns. This notion is adopted by most governments in different countries and has made their stock (securities) markets vital in the quest to spur the economic growth. Therefore, this study is undertaken with the purpose or objective to determine the relationship between the GDP growth and the stock market returns. The study adopted a causal relationship research design in order to determine the relationship between capital markets return and economic growth. The study population was the Nairobi Securities Exchange 20 share index and Gross domestic product. Moreover, the period under study was between 1982 to 2012 and the data collected within the period was analysed using descriptive statistics, correlations and linear regression analysis. The study results showed there was weak negative correlation between GDP growth and Changes in SMI. The reason being that NSE20 share index was represented by a few companies in the whole economy and GDP is measured in terms of sales not profit. Changes in FDI and population also indicated a weak positive correlation to GDP growth. The study recommends that to ensure the importance of the NSE20 share index does not diminish in the economy; both the government and the Capital Market Authority (CMA) encourage more companies to be part of the securities market.