Impact of gross domestic product growth rate and interest rate variations on the Nairobi securities exchange performance

Abstract

As an economic institution, securities market plays a major role of enhancing the efficiency of capital formation and allocation. Thus the overall development of the economy is a function of how well the securities market performs. This study was therefore based on the view of stock market dynamics as the interactions among macroeconomic variables with respect to Gross Domestic Product Growth Rate and Interest Rate Variations. The study objective was set out to determine the impact of GDP growth rate, Interest rates variations on Nairobi Securities Exchange Performance. The study therefore attempted to explore how the Kenyan securities markets were impacted on by GDP growth rate and Interest rate variations. The study was based on the efficient market hypothesis as postulated by Fama (1970) which asserts that an efficient market is capable of quickly digesting new information on the economy, an industry, or the value of an enterprise and accurately reflect it in securities prices. The study was designed to undertake explanatory study which was longitudinal in the quest to answer the research questions. The subjects or cases analyzed were the same or at least comparable from one period to the next, the analysis involved some comparison of data between or among periods. Longitudinal research was justifiable for this study as same macroeconomic variables were observed and analyzed using quarterly time series data covering the January 2003 to December 2014. The target population consisted of all listed companies at NSE from which NSE 20 share index was derived. Secondary data was used in the study the NSE share index was collected from Nairobi stock exchange. While data on GDP growth rate was obtained from Kenya bureau of statistics, data on interest rates was obtained from Central Bank of Kenya. The study concludes that a positive correlation exists between GDP and Nairobi securities exchange share performance .Therefore GDP significantly affected the performance of NSE. The study also concludes low positive correlation between interest rates and share performance, hence Interest rate variations did not significantly influence the NSE share performance.