The Effect of Interest Rates Changes on Performance of the Nairobi Securities Exchange 20 Share Index

Abstract

The Central Bank interest rate encountered various changes between 2010 and 2012.These changes were attributed to efforts by the Monitery policy committee (MPC) to strenghthen the Kenya shilling currency which was getting weaker against major currencies in the world.The study therefore sought to examine if Interest rate changes had an effect on the performance of the Nairobi securities Exchange 20 share Index.The NSE 20 share index is a market-capitalization weighted index for the Nairobi Securities Exchange which was used to represent the entire NSE popolation. Event-study methodology was used to measure the magnitude of interest rates changes on performance of the NSE 20 share index. The study was motivated by the need to establish how fiscal tools used by the central bank affect the performance of the NSE while trying to control other aspects of the economy like foreign Exchange rates and inflation rates. Historical data on interest rates and NSE 20 Share Index was obtained from the CBK weekly bulletin and NSE reports respectively for the period January 2010 – Dec 2012. Abnormal returns and Cumulative abnormal returns were calculated for 21 days event windows, 10 days before the event and 10 days after the event. T-statistical test were also conducted to test significance of the abnormal Returns (AR) and Cumulative abnormal returns (CAR). The findings of the study indicate that interest rates changes had an effect on performance of the NSE 20 share index. Interest rate hikes resulted to a decline in the NSE 20 share index while Interest rate cuts resulted to a rise in the NSE 20 share index.