Volatility of Selected Macroeconomic Factors on Stock Market Returns in Kenya

Abstract

Economic indicators such as money supply, gross domestic product growth, inflation, and interest rates for firms in the Nairobi Stock Exchange 25 index series have fluctuated over the last decade, posing a risk of severe capital flight by foreign investors. This study examined stock return variation and selected macroeconomic variables.  A longitudinal panel data design was deployed to assess the mean effects of the selected economic indicators on stock returns. The study further estimated conditional variance and volatility persistence of stock market returns using a Generalized Autoregressive Conditional Heteroskedasticity model. The study selected firms from the Nairobi Stock Exchange 25 index series, which tracks the performance of 25 listed companies based on criteria such as market capitalization, liquidity, and trading activity. Positivist research philosophy guided the analysis.  The study drew on capital asset pricing theory and Fisher’s effect theory. The study used census techniques because it included all firms in the index series.  The study covered the period 2015 to 2025. The researcher collected secondary data using a data extraction table. The researcher conducted relevant diagnostic tests to assess data reliability. The researcher analyzed observations using descriptive statistics, particularly the mean and standard deviation. To adhere to ethical considerations, the researcher used the gathered data only for the intended objectives. The study showed an overall statistically significant model, with an R-squared of 0.9456 and an Adjusted R-squared of 0.9439, indicating that these variables explain nearly 95% of the variation in stock returns. Consequently, the results revealed a positive, significant correlation between money supply, GDP growth, and stock returns. Similarly, the inflation interest rate was negatively and significantly correlated with stock returns. The GARCH results showed an ARCH effect of 0.505 and a GARCH effect of 0.213, yielding overall persistence of approximately 0.7, with 0.72 as the constant. The results underscore the critical role of macroeconomic stability in shaping stock market outcomes. Economic expansion and liquidity growth boost investor returns, while inflation and high interest rates reduce profitability. This suggests that policymakers should prioritize maintaining low inflation and stable interest rates while fostering economic growth to support a favorable investment climate.