The Effect of Macroeconomic Factors and Political Events on the Performance of Nairobi Securities Exchange in Kenya

Abstract

Stock market plays significant positive role in development of the capital market. Political events and changes in macroeconomic variables have been suspected to affect the trading volume and stock return. Thus, this paper analyses the effect of macroeconomic factors and political events on the performance of NSE in Kenya covering the period from January 2000 to December 2014 using inflation, exchange rate, money supply, 91-Day Treasury bill and political events represented using dummy variables. The study uses secondary data the main source of which is the Capital Markets Authority quarterly bulletins and the Central Bank of Kenya statistics. OLS was applied to estimate the effect of macroeconomic factors and political events on the performance of NSE in Kenya. The regression results show that exchange rate, money supply, 91-Day Treasury bill and political events were significant except inflation. Money supply and political instability incidents shows a positive and strong correlation to NSE. Inflation had a positive correlation to NSE, although the relationship was not significant. The result also shows that exchange rate and 91-Day Treasury bill had negative correlation to NSE performance but was significant. Therefore, a joint effort from individuals, stakeholders, economists, investors and government is required to secure effectiveness of the financial market in Kenya since financial markets are dynamic, and affected by various macroeconomic factors and some political instability incidents over the recent past like the 2007/2008 post-election violence.. The result of the study may encourage and motivate the investors and policy makers both domestically and internationally. The government should ensure secure environment that would increase morale of investors and help them to make vital strategic decisions.