Effect Of Macroeconomic Variables On Value-at-risk Of Stock Returns For Firms Listed At The Nairobi Securities Exchange

Abstract

This study investigated the effect of macroeconomic variables namely inflation, interest rate and exchange rate on Value-at-risk of stock returns for listed firms in the Nairobi securities exchange for the period between January 2008 and April 2017 on monthly 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 Eviews. The general objective of the study was to analyze the effects of macroeconomic variables on the VaR of stock returns of firms listed in the Nairobi securities exchange. Based on the objectives of the study, analysis was done through the use of impulse responses functions and variance decomposition. The showed that VaR of stock returns responded to shock of the interest rate, exchange rate and inflation rate. A regression of VaR on inflation from the impulse responses demonstrated insignificant effect of inflation on VaR of stock returns of firms listed at NSE. The impulse response also revealed that the exchange rate had no significant effect on stock retuns VaR. Lastly interest rate was seen to have positive effect on the Value-at-Risk of the listed stock. From the study findings it was concluded that it is possible to predict the current and the future VaR stock returns of firms listed in the Nairobi securities exchange by studying the past values of interest rates and inflation. The study further concluded that studying real gross exchange rates past values do not help in predicting the present and the future values VaR of stock returns of firms listed at NSE.