Macroeconomic Variables, Volatility and Stock Market Returns: A Case of Nairobi Securities Exchange, Kenya

  •  Evans Kirui    
  •  Nelson Wawire    
  •  Perez Onono    


This study sought to evaluate the relationship between Gross Domestic Product, Treasury bill rate, exchange rate, inflation and stock market return in Nairobi Securities Exchange Limited. The study determined the response of the stock returns to a shock in each of the macroeconomic variables. The effect of changes in each of the macroeconomic variable on the volatility of stock returns in Nairobi Securities exchange limited was also determined. Engle-Granger two step method was used to establish the co integrating relationship between stock returns and the macroeconomic variables. Threshold Genaralized Autoregressive Conditional Heteroscedasticity (TGARCH) model was used to capture the leverage effects and volatility persistence at the NSE. Published time series quarterly data from 2000 to 2012 was sourced from the Central Bank of Kenya, Kenya National Bureau of Statistics. Empirical results of the regression model revealed that exchange rate showed a significant relationship with stock returns. For a one percentage increase in depreciation of a domestic currency, the model predicted stock returns to decrease by 1.4 percent. Gross Domestic Product, Inflation and the Treasury bill rate indicated insignificant relationships. The effects of one standard deviation shock on each of the macroeconomic variable on stock returns revealed that shock in exchange rate was negative but eventually reverted back to equilibrium thereafter. The results of the TGARCH model for exchange rate, Gross Domestic Product and Treasury bill rate revealed that the impact of news was asymmetric and there was presence of leverage effects. There was absence of volatility persistence among all the macroeconomic variables.

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