Effect of Macroeconomic Variables on Stock Market Volatility in Kenya
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Date
2017
Authors
Journal Title
Journal ISSN
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Publisher
Jomo Kenyatta University of Agriculture and Technolog
Abstract
Stock market volatility is widely regarded as one of the factors that erode investor
confidence in African markets. This happens when a sharp fluctuation in share
prices is not explained by changes in fundamental economic factors. Theories in
finance have for long viewed macroeconomic variables as predictors of stock
market volatility, while studies in behavioral finance have associated stock market
volatility with investor behavior, particularly the herding behavior. This study
sought to examine the relationship between macro-economic variables and stock
market volatility in Kenya. Specifically, the study examined the direct
relationship between each of the four selected macro-economic variables namely;
interest rates, inflation rate, foreign exchange rate, gross domestic product, and
stock market volatility. The study further explored the moderating effect of
investor herding behaviour on the direct relationship between selected
macroeconomic variables and stock market volatility. The study adopted a descriptive
research design and targeted all companies listed on the Nairobi Securities
Exchange from January 2001 to December 2014. The study used secondary data
on interest rate, exchange rate, inflation rate and GDP, covering a period of 14
years. The data was obtained from the Kenya National Bureau of Statistics and
the Central Bank of Kenya. Data on share prices and market indices was acquired
from the Nairobi Securities Exchange. Stock market volatility was measured by
computing the standard deviation of the Nairobi Securities Exchange daily and
monthly returns over the 14 year study period. The study used a market-wide herd
index which was calculated using the Cross Sectional Standard Deviation (CSSD)
method. Data was analyzed using E-views version 8. The study employed both
correlation and regression analysis. Results from correlation analysis found that
there was a significant relationship between all selected macro-economic
variables and stock market volatility. However, when the long run and short run
causal relationship was tested using vector error correction model (VECM) and
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granger causality test, the study found that interest rate and inflation granger
cause stock market volatility both in the short run and long run in Kenya, while
GDP and exchange rate did not have a direct causal relationship with stock
market volatility. The study also established that investor herding behaviour had
no direct causal relationship with stock market volatility, however, investor
herding behaviour was found to significantly moderate the relationship between
exchange rate and stock market volatility on the Nairobi Securities Exchange. The
study findings were limited to selected macro-economic variables and methods
used in measuring and analysing the relationship. Further studies are
recommended to investigate other macro-economic variables in order to
understand their effect on stock market volatility in Kenya. The study
recommends a strict monetary policy and control of factors contributing to change
in inflation and interest rates which the study finds to be the key variables
contributing to stock market volatility.
Description
Theses and Dissertations
Keywords
Stock Market Volatility-Dissertation, Macroeconomic Variables