Systematic risk and performance of stock market in Kenya

Nathan Mwenda Mutwiri,Lucy Wamugo,Job Omagwa

doi:10.20525/ijrbs.v10i4.1180

Nathan Mwenda Mutwiri, Lucy Wamugo + Show 1 more

Open Access

https://doi.org/10.20525/ijrbs.v10i4.1180

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Abstract

Stock prices in Kenya have been experiencing drastic volatility over the years. In the year 2015 alone, the value of the listed companies shrunk by about 2.5 billion USD, representing about 25% of the national government annual budget. The performance of the stock market is an important proxy of a country’s economic environment. Rational investors constantly value and revise their portfolio composition so as to maximize their wealth. Whereas effectively diversified portfolio minimizes the unsystematic risk, systematic risks cannot be managed by simple diversification. Investors, therefore, need to understand the effect of these systematic risks on the stock performance. The study sought to determine the relationship between systematic risk factors using Inflation and interest rates and the performance of the stock market in Kenya. The study adopted a positivist philosophy and employed a correlation research design. The study targeted all the stock listed in the Nairobi Securities exchange. The study was underpinned by the Efficient Market Hypothesis, Arbitrage Pricing theory, and used integration analysis to establish the relationships between the variables of the study. The study found a significant long-run positive relationship between interest rate, inflation, and performance of the stock market in Kenya. Investment firms, the financial analyst should use past data on 91 Treasury bills rate and Inflation, to predict the future performance of stock exchange for the benefit of investors.

Highlights

Performance of a stock market is important element in any financial market and economy (Kitati, Evusa, & Maithya, 2015)
The study found that in the short run treasury bills rate significantly influenced the stock returns. These results showed that there is a positive relationship between interest rates and the stock prices
The findings indicated that there is no causal relationship between inflation and other independent variables used in the study, besides inflation being found to be the important variable in explaining stock pricing prices in Nigeria.The study used annualized data and did not report quarterly changes

Summary

Introduction

Performance of a stock market is important element in any financial market and economy (Kitati, Evusa, & Maithya, 2015). Investors invest in the stock market with an aim of increasing their wealth or generate positive returns without necessarily increasing their risk to greater magnitudes (Apiyeva, 2007). Most investors believe they can outperform the market by generating higher returns than the markets (Erdugan, 2012). When the stocks markets operate smoothly and efficiently, they facilitate economic growth and lower production costs and business risk. This in the long run promotes growth of GDP and growth of employment (Handa, 2005)

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