A Test of the Effect of Macro-economic Variables on Volatility of Securities Prices: Evidence from Nairobi Securities Exchange

Konyango Griffin Okoth, Joseph Lumumba Barasa


Volatility as an erratic rise and fall in the stock returns with a lot of
demerits especially when it comes to valuation of equities at the stock
exchange in that it may cause the bourse to value the securities
incorrectly. All it may act as a cold shoulder to investors confidence
due to increased uncertainty and hence risk which subsequently may
lead to limited investment as a result of the high capital cost emanating
from high premium, demanded by shareholders in their investment. This
will eventually lead to a slow growth and development of an economy.
The main objective of this study is to establish the effect of
macroeconomic variables on volatility of securities prices in the Nairobi
Securities Exchange (NSE). To achieve the objective of the study, models
were developed using annual inflation rate, exchange rate, interest
rate, money supply, broad money supply and general money supply as
the independent variables and the stock returns as the dependent

An empirical analysis was conducted using Nairobi Securities
Exchange (NSE) listed firms as the population. The period of analysis
was 22 years from 1 st January 1990 to 31 st December 2011 on an
annual basis. The correlation results reveal that exchange rate (EXR)
has the highest negative impact on volatility of security prices, whereas
inflation rate (INF) had the lowest marginal impact and/ or effect on
volatility of security prices. Moreover, interest rate (INT) had a
significant, negative impact on volatility of security prices. Others such
as general money supply (GMS), money supply (M3) and broad money
supply (M3X) had a higher positive effect on volatility of security prices.
In our empirical analysis, by employing the EGARCH and TGARCH
model we were able to deduce that the level and/ or degree of volatility
persistence, volatility magnitude and leverage effects to be in existence
at the NSE but varied in terms of significance of the shocks impact on
stock volatility, of each of the selected macroeconomic variables.
However, collective impact was significant.

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