Abstract:
This study investigated the effect of macroeconomic variables namely real gross domestic
product, real interest rate and exchange rate on the stock price index of listed commercial banks
in the Nairobi securities exchange for the period between January 2000 and December 2013 on
quarterly time series data. The results were reported using the Johansen cointegration test, vector
error correction model (VECM) and causality test, which were reported using outputs from E-
views. The general objective of the study was to analyze the effects of macroeconomic variables
on the stock price index of listed commercial banks in the Nairobi securities exchange. The study
found both short run and long run relationship between stock price index and two explanatory
variables, real interest rates and exchange rates but no relationship was found to exist between
the explained variable and real gross domestic product.
The cointegration results established that stock price index had a significant and positive long
run relationship with real interest rates and exchange rates. The study further found a negative
but insignificant long run relationship between the dependent variable and real gross domestic
product. VECM results established that stock price index had short run relationship with real
interest rates and exchange rates. Real gross domestic product was found to have no short run
relationship. In determination of existence or otherwise of causal relationship, Granger causality
tests were performed and the results established that there was no causal relationship between
stock price index and real gross domestic product however a bidirectional causal relationship real
gross domestic product and exchange rate was established. The results further found a
unidirectional causal relationships one running from stock price index to real interest rate and
another running from stock price index to exchange rate.
From the study findings it was concluded that it is possible to predict the current and the future
stock price index values of listed commercial banks in the Nairobi securities exchange by
studying the past values of real interest rates and exchange rates. The study further concluded
that studying real gross domestic product past values does not help in predicting the present and
the future values of stock price index of listed commercial banks in Kenya.
