Effect Of Macroeconomic Variables On The Stock Price Index Of Listed Commercial Banks In The Nairobi Securities Exchange

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.