Abstract:
Stock prices fluctuations for quoted companies occur daily due to both company specific
variables like company earnings with corresponding dividend policies, and multiple macro-economic variables. This study sought evidence supporting the existence of influence of the
selected macro-economic variables of: foreign exchange rate of hard currencies, interest rate and
inflation rate on share prices fluctuations based on the weighted average monthly data from
January 2008 to December 2012 for the companies listed on the Nairobi Securities Exchange in
Kenya. The influence of selected macro-economic variables on stock exchange provide
important implications for monetary policy, risk management practices, financial securities
valuation and government policy towards financial markets. The study utilsed secondary data
that was obtained from: Central Bank of Kenya, Institute of statistical Kenya and Nairobi
Securities Exchange. To investigate the effect of the selected macro-economic variables on share
prices of the companies listed on the Nairobi Securities Exchange, simple and multi-variate
regressions analysis was used. For all of the quoted companies it was desirable to find if the
stock prices fluctuations are predominantly due to the selected macro-economic variables. The
Nairobi Securities Exchange may derive great benefit through more investors raising new capital
in the share market when stocks are in great demand, and more extensional investment of
companies by raising additional capital through stock splits or issuing more shares out of their
authorized share capital. The study found that interest rate had a predominant effect on stock
market price indices as compared to the other macro-economic variables. Interest rate, exchange
rate for both the Euro and US Dollar had a negative effect on stock market indices for companies
quoted on the Nairobi Securities Exchange. When the Kenya shilling depreciates the stock
market indices gain in points. The inflation rate had a negative effect on stock market
performance indicating that higher levels of inflation rate result in lower stock market indices in
Kenya. Other macro-economic variables would also have impact on stock market indices for
companies quoted on the Nairobi Securities Exchange since the predictor model did not account
for all variables as it had a low R2 of 15.1 %.
