Effect of macroeconomic variables on the stock price index of listed commercial banks in the Nairobi securities exchange

Abstract

he co-integration results established that stock price index had a significant and positive long run relationship with real interest rates and exchange rates. The study further found a negative but insignificant long run relationship between the dependent variable and real gross domestic product. VECM results established that stock price index had short run relationship with real interest rates and exchange rates. Real gross domestic product was found to have no short run relationship. In determination of existence or otherwise of causal relationship, Granger causality tests were performed and the results established that there was no causal relationship between stock price index and real gross domestic product however a bidirectional causal relationship real gross domestic product and exchange rate was established. The results further found a unidirectional causal relationships one running from stock price index to real interest rate and another running from stock price index to exchange rate.From the study findings it was concluded that it is possible to predict the current and the future stock price index values of listed commercial banks in the Nairobi securities exchange by studying the past values of real interest rates and exchange rates. The study further concluded that studying real gross domestic product past values does not help in predicting the present and the future values of stock price index of listed commercial banks in Kenya.