Effect Of Macro-Economic Factors On The Performance Of The Equity Market Of Nairobi Securities Exchange

ABSTRACT

The study sought to establish the effect of macroeconomic factors on the equity market

performance of Nairobi Securities Exchange. The study was guided by an objective; to

examine the effect of the selected macro-economic factors on equity market performance

in Kenya. The selected macro-economic factors included inflation rate, exchange rate,

money supply and real Gross Domestic Product. The study followed descriptive research

design and used secondary data. The data spanned the period between 2005 and 2014.

The data used for the analysis was the average annual figures and was obtained from;

Nairobi Securities Exchange (equity market capitalization), Central Bank of Kenya

(Inflation rate), Kenya National Bureau of Statistics (Average yearly GDP growth rate)

and International Monitory Fund website (Money Supply M3). The data was analyzed

using SPSS version 21. The study used equity market capitalization to measure equity

market performance as well as Average annual inflation rate to measure inflation,

Average annual exchange rate to measure Exchange rate, Average yearly monetary base

(M3) to measure money supply and Average annual GDP growth rate to measure GDP.

The study results established that Equity market capitalization (used to measure Equity

market performance) as well as average annual inflation rate (used to measure inflation),

money supply (used M3), and GDP growth rate deteriorated just before, during and

immediately after the general elections. The regression analysis obtained Coefficient of

determination (R), Correlation Coefficient (R-Square), P-Value and F-test statistics

which were; 0.865, 0.748, 0.091 and 3.715 respectively. Since R was positive (0.865) the

relationship between the Equity Market Performance and the macro-economic factors

was positive. Since, R-Square was below 0.75 as it was (0.748) the relationship between

NSE performances as measured by Equity market capitalization is weak. However, the

study results established that the relationship between exchange rate as measured by

average annual exchange rate and Equity Market Performance is inverse as the

corresponding coefficient in the model was negative. Also, since P-Value (0.0061) was

smaller than 0.05, the established model describing the relationship between the study

variables is statistically significant. P-Values associated with variables GDP and

exchange rate were all smaller than 0.05 depicting that they were individually statistically

significant in predicting the Equity market performance whereas money supply and

inflation rate were slightly above 0.05 hence statistically insignificant. The study

concludes that there is a positive relationship between the selected macro-economic

factors (Inflation rate, Exchange rate, money supply, and GDP) and Equity market

performance. Further, the study concludes that the relationship between exchange rate

and equity market performance is inverse.