Effects of Macroeconomic Volatility on Stock Prices in Kenya: A Cointegration Evidence from the Nairobi Securities Exchange (NSE)

This study examined the effects of macroeconomic volatility on stock prices via selected macro variables using the Johansen co-integration methodology. Time series data was obtained from the Kenya National Bureau of Statistics (KNBS) and the Central Bank of Kenya (CBK) for the period 1998-2015. Macro variables studied include inflation, money supply, exchange rates and interest rates against the NSE 20 share index. The study exploits the presence of unit roots of order 1(1) on the data set to apply the Johansen procedure and the Vector Error Correction Model (VECM) for data analysis. The study finds both a long-run equilibrium relationship between stock prices and the macroeconomic variables and between inflation and other macro variables. Specifically, and contrary to earlier evidence on the Kenyan market, the results suggest a negative long-run equilibrium relationship between money supply and stock prices. Inflation shows negative but insignificant relationship. Exchange rates and interest rates show a positive relationship. The short-term dynamics from the VECM support earlier documented evidence, implying the earlier evidence reflect short-run and not long-run dynamics. The study concludes that the effects of inflation seem to outweigh any possible gains from money supply on aggregate firm output in the long-run. Also, the study adduces evidence of possible spurious problems on earlier documented evidence from the reviewed studies that could be attributable to non stochastic processes in the models used. A robustness check using a multivariate approach points to this and confirms the co-integration results.