Effect of Inflation on Performance of Nairobi Securities Exchange in Kenya

Abstract

Effect of inflation on the stock exchange has been under scrutiny in past few decades due to the interest potential investors have shown in the stock market globally. However, the empirical studies in this area have concentrated more on developed countries with very little evidence from developing economies with emerging stock markets such as Kenya. The 'purpose of this study therefore was to determine the effect of inflation on the market activity and market liquidity performance of Nairobi Securities Exchange (NSE). The specific objectives were: to determine the effects of inflation on the value of shares traded at the NSE, to determine the effects of inflation on volume of shares traded at the NSE and lastly, to determine the effects of inflation on the total value of shares traded to market capitalization. The study is anchored on the Fishers theory on inflation and stock market return sand guided by a conceptual framework where the dependent variables are the volume of share traded, the value of share traded and the value of share traded to market capitalization at NSE while the independent variable is the inflation rate. The study adopted a correlation research design to establish effect. Secondary data was used which comprised of all ordinary shares traded between 2008 and 2013 on a monthly basis and 72 observations (n = 72) were recorded. Data was obtained through review of both Kenya National Bureau of Statistics (KNBS) and NSE documents. A correlation analysis between inflation rate and the value of shares traded showed an inverse relationship of -759.48 and t = 1.55 ~ 2.0 meaning that inflation rate is significant and a unit increase leads to a -759.48 decrease in the value of shares traded. The coefficient of determination of inflation rate is R2 = 0.376 meaning that inflation rate accounts for 37.6% of the performance- of NSE in terms of market value. Further, the analysis of inflation rate on volume of shares traded indicated a correlation coefficient of -6.06 and t = -2.21 meaning that inflation rate is significant and a unit increase ' leads to a -6.06 decrease in the volume of shares traded. The coefficient of determination of inflation rate against volume of shares traded is R2 = 0.549 meaning that inflation rate accounts for 54.9% of the volume of shares traded at NSE. In conclusion, the overall performance ofNSE measured by value and volume of shares traded is inversely affected by changes in the rates of inflation. These findings are useful for policy formulation to sustain performance of NSE against inflationary effects.