The Relationship Between Lagging Macroeconomic Indicators And Stock Market Return Of Insurance Companies Listedin The Nairobi Securities Exchange

Abstract

The Nairobi Stock Exchange is a very important institution in the local capital markets. Public companies are able to raise capital and equally the government is able to borrow through the various treasury instruments. Insurance companies have utilized this stock exchange to borrow capital. Traders invest in the listed firms with the expectation of capital appreciation in the form of price increase and income through dividend returns. Among the many factors that define the expectations of the market players and thus the stock price movements are the lagging macroeconomic factors. The government through its policy and regulatory role has a pivotal role on the macroeconomic indicators; interest rate, inflation rate and exchange rate. In this regard, the study sought to determine the relationship between lagging macroeconomic indicators and stock market return of insurance companies listed in the Nairobi securities exchange. This study adopted a correlational research design to explore the relationship between the lagging macroeconomic indicators and insurance stock market return. Monthly time series secondary data for a five year period 2009 to 2013 for the variables are used. Vector Error Correction Model (VECM) was employed to achieve the three objectives of the study. The study concludes that there exist a relationship between interest rate and the insurance stock market return. However, the macroeconomic variables, inflation rate and exchange rate had no significant effect on the insurance stock market return.