Abstract:
This paper analyzed factors influencing the market index for the Nairobi Stock Exchange (NSE), taking a time horizon between January 2008 to December, 2010. We posit that money supply, inflation rates, exchange rates, and interest rates are significant covariates affecting the market index. The market index and the acroeconomic covariates data was obtained from the NSE and the Central Bank of Kenya. Multiple regression analysis was used to estimate the effects of the chosen factors that affect stock values, with the market index being the indicator variable for stock values. Regression analysis results revealed that the selected acroeconomic covariates - interest rates, exchange rates and inflation - significantly affect the value of stocks in the NSE. Money supply was not significant even though it had a positive correlation with the stock prices. Factor regression models described the sensitivity of an asset return as a function of one or more factors. Based on our analyses, we conclude that traders should constantly review the prevailing economic conditions, based on the patterns of the determinant macroeconomic factors identified in this study, to model their investment strategies. The scope of our study being limited to NSE and four macroeconomic factors, the findings of this paper may not be directly applicable to other financial markets. We therefore suggest future research directions to extend to other financial markets and include all macroeconomic factors.
