Effect of selected macro-economic variables on securities performance at the Nairobi Securities Exchange, Kenya

Abstract

The equity securities market is an integral component of any country's financial system, and its performance is intertwined with the broader macro-economic environment. Equity securities market determines the state of the economy; this is through stock and asset prices fluctuations as well as company earnings with corresponding dividend policies, and multiple macroeconomic variables. The inherent problem has been how do changes in specific macro-economic variables affect the performance of the equity securities market at the Security Exchange. This study sought to establish the influence of the selected macro-economic variables on equity securities market performance at Nairobi Securities Exchange (NSE). The specific objectives were to establish the effects of exchange rate; interest rate; inflation rate; money supply; and Gross Domestic Product on equity share prices fluctuations based on the NSE-20 from when the economy was liberalized. The study was guided by the Capital Asset Pricing Model, the Arbitrage Pricing Theory and the Efficient Market Hypothesis. An explanatory research design was used to determine the effect of selected macro-economic variables on securities exchange market performance. Annual time series secondary data for the periods 1986 to 2022 was used. Findings of diagnostic test demonstrated that there was no multicollinearity among the independent variables (VIF=8.27), residuals were homoscedastic (p=0.9740>0.05), and there was no autocorrelation among the residuals (p=0.7874>0.05). The results of Shapiro wilk normality test showed that the study's variables were normally distributed. The Augmented dickey fuller unit root test both showed that there was no unit root and that the variables had a short run relationship. The study findings were: the exchange rate (β =-0.0147, p =0.0000 ) indicating negative and significant effect on equity security indices; the interest rate (β =-0.3469 p =0.001,) indicating negative and significant effect on equity security indices; inflation rate (β =0.2377, p =0.002) indicating positive and significant effect on equity security indices; money supply (β =-1.51e-13, p =0.0000) which indicates a negative and significant effect on equity security indices; and gross domestic product (β =1.10e09, p =0.00368) had a positive and significant effect on equity security indices. The ARDL model used in the analysis yielded an adjusted R-squared =0.9998 (99.98%), Prob > F = 0.0000. This means that interest rate, exchange rate, inflation rate, money supply and gross domestic product explained 99.98% of the equity security indices. The study concluded that exchange rate, interest rate and money supply significantly affect equity security indices negatively while inflation rate and gross domestic product significantly affect equity security indices positively. The study therefore recommends the Central bank of Kenya to employ measures intervening foreign exchange markets to stabilize the currency, implement appropriate interest rate policies, and maintaining adequate foreign exchange reserves. The policy makers should prioritize price stability and monitor the growth of money supply to ensure it remains in line with the country's economic fundamentals. Policy makers should also strike a delicate balance between controlling inflation and supporting economic growth by closely monitoring economic indicators and adjusting interest rates accordingly.