The Effect of Inflation and Money Supply on the Returns of Firms Listed at the Nairobi Securities Exchange

Abstract

Changes in the macroeconomic environment have affected the returns of firms listed on the Nairobi Securities Exchange for a long time. Knowledge of the variability of stock returns in regard to macro economic factors is imperative for both investors and policy actors. The stock market returns of listed firms are usually contained in their respective securities' prices and these prices are affected by inflation and money supply. This study is set to establish the effect of inflation and money supply on the returns of firms listed at the Nairobi Securities Exchange. The study adopted correlation study design and monthly empirical time series data to analyze and describe the effect of inflation and money supply on the returns of firms listed at Nairobi Securities Exchange. Secondary data on consumer price index, money supply and Nairobi Securities Exchange all share index (NASI) was used to describe the relationship between the variables. The study found out that Stock Market Returns seems to have decreased as a result of increase in inflation meaning that the two variables have an inverse relationship. The study found out that a unit increase in inflation leads to 2.741 decreases in Stock Market Returns. On the other hand, it was found that Money Supply has a positive relationship with Stock Market Returns. The study found out that a unit increase in Money Supply leads to 0.054 increases in Stock Market Returns. The findings of this study show that both Inflation and Money Supply explains only 36.1% of the change in Stock Market Returns. This implies that the changes in Stock Market Returns are largely affected by other factors other than the two. From the findings and conclusion it is recommend to the policy makers of the government that it is necessary to put measures in place to contain inflation which is ever increasing. This will not only help to cushion investors against negative returns but it will also help to stabilize the economy.