Factors Determining Stock Market Returns: Case of Nairobi Stock Exchange

Abstract

The study attempts to establish if the changing macroeconomic factors and the industry variables can predict the variation on the Nairobi Stocks Exchange (NSE) stocks return. It is centered on lack of conclusiveness of the debate on what factors should be included in a predictive model for stocks and has examined a number of macroeconomic and industry factors. This study adopts a regression model that related stock returns to various selected macro and industry factors using data of 20 companies that constitute the NSE index. The study used monthly data spanning the year 2006 to 2010. The regression results indicate that, four of the variables i.e. market return (NSE1), exchange rate for US/KSH, market to book value ratio have a positive and significant relationship with an individual company stock market returns. Risk Free rate (91 Treasury bill rate) also had a positive and significant relationship while industrial growth opportunity and inflation were found to be negative and significant. These findings will have significant effects on stock market investors’ as well as the Government and the Capital Markets Authority (CMA) in the formulation of polices and guidelines. It will also provide the Government with a better understanding on the effect of a change in the fiscal and monetary policies in the stock market and the economy at large. This is crucial to the Government as it seeks to promote the capital market as a source of alternative funding for economic growth. Investors wishing to construct portfolios may also consider inflation rates, exchange rates, market to book value ratio, industrial production and the stock market index as changes in either or all of these factors may influence the returns on stocks positively or negatively and hence the investor may choose the best time to either buy or sell their securities. x