DETERMINANTS OF BOND MARKET INDEX AT THE NAIROBI SECURITIES EXCHANGE IN KENYA

HENRY LONGEI

Abstract


This study evaluated the determinants of the bond index at the N.S.E. The study evaluated the effects of key variables namely, interest rate, inflation and exchange rate on the market index of bonds at the N.S.E. The effect of the changes of each of the above variables on the market index was determined. The researcher employed a descriptive research design. The target population comprised of 42 investment Banks and 21 Stock Brokers at the NSE. For each category, 2 staff members were selected. Therefore a sample size of 96 staff members was chosen. The study adopted a regression of the variables against the market index of the N.S.E. The data from the study was analysed quantitatively using SPSS software version 22. Ms Excel was used to generate trend lines. The data analysed were represented using tables, graphs and pie charts in a more detailed and comprehensive manner for easy interpretation of information. The study revealed that interest rate, inflation and exchange rate were found to be satisfactory variables in bond market index. This was supported by coefficient of determination of 46.2%. Regression of coefficients results indicated that interest rate and Bond market index were negatively and significantly related (r=-0.216, p=0.006). Further, regression results showed that inflation and Bond market index were negatively and significantly related (r=-0.146, p=0.030). Trend analysis results indicate that inflation and bond market index were inversely related. Finally, Regression results indicated that exchange rate and Bond market index were negatively and significantly related (r=-0.186, p=0.011). A trend analysis between exchange rate and bond market index indicated that exchange rate and bond market index were inversely related. Based on the findings the study concluded that interest rate, inflation and exchange rate were key determinants of bond market index at the Nairobi Securities Exchange. The three variables were found to have an inverse relationship with bond market index. This study found that interest rate, inflation and exchange rate affected bond market index. It was therefore recommended that the Central Bank of Kenya identifies policy intervention to cab this situation.

Key terms: bond, Bond Market Index, Capital market, Co-integration, financial asset, Interest rate, Inflation, Exchange rate


Full Text:

PDF

References


Rachel, L., & Smith, T. (2015). Secular drivers of the global real interest rate.

Grishchenko, O. V., & Huang, J. Z. (2013). The inflation risk premium: Evidence from the TIPS market. The Journal of Fixed Income, 22(4), 5-30.

Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2014). Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework. In Festschrift in Honor of Peter Schmidt (pp. 281-314). Springer New York.

Khan, Z., Khan, S., Rukh, L., Imdadullah, K., & Rehman, W. (2012). Impact of Interest Rate, Exchange Rate and Inflation on Stock Returns of KSE 100 Index. International Journal of Economic Research. Available onlin at: www. ijeronline. com.

Cournède, B., & Denk, O. (2015). Finance and economic growth in OECD and G20 countries.

Ogunmuyiwa, M. S. (2010). Investor’s Sentiments, Stock Market Liquidity and Economic Growth in Nigeria. Journal of Social Sciences, 23(1), 63-67.

Nzotta, S. M., & Okereke, E. J. (2009). Financial deepening and economic development of Nigeria: An Empirical Investigation.

Diebold, F. X., & Rudebusch, G. D. (2013). Yield Curve Modeling and Forecasting: The Dynamic Nelson-Siegel Approach. Princeton University Press.

Bauer, M. D., & Neely, C. J. (2014). International channels of the Fed's unconventional monetary policy. Journal of International Money and Finance, 44, 24-46.

Greenwood, R., & Vayanos, D. (2010). Price pressure in the government bond market. The American Economic Review, 100(2), 585-590.

Krishnamurthy, A., & Vissing-Jorgensen, A. (2011). The effects of quantitative easing on interest rates: channels and implications for policy (No. w17555). National Bureau of Economic Research.

Hall, G. J., & Sargent, T. J. (2011). Interest rate risk and other determinants of post-WWII US government debt/GDP dynamics. American Economic Journal: Macroeconomics, 3(3), 192-214.

Woodford, M. (2011). Interest and prices: Foundations of a theory of monetary policy. princeton university press.

Adam, A. M., & Tweneboah, G. (2008). Do Macroeconomic Variables Play any Role in the Stock Market Movement in Ghana? MPRA Working Paper No. 9368.

Allen Graine, 2015. http://blogs.cfr.org/campbell/author/campbellguest

Ajayi, R.A., J. Friedman, S. Mehdian (1998). Relationship between Stock Returns and Exchange Rates:Tests of Granger Causality, Global Finance Journal 9 (2), pp. 241-251.

Bethlehem, J. G. (2009). The rise of survey sampling. Discussion Paper 09015. The Hague/Heerlen. The Netherlands: Statistics Netherlands.

Chen, Roll and Ross(1986), Economic Forces and the Stock Market The Journal of Business, 1986, vol. 59, issue 3, 383-403

Clare and Thomas, (2015) ‘The overreaction hypothesis and the UK stock market’ DOI: 10.1111/j.1468-5957.1995.tb00888

(Elly & Oriwo, 2013).The Relationship Between Macro Economic Variables And Stock Market Performance In Kenya Vol 3, No 1 (2013)

Fama, E. (1970). “Efficient capital markets: a review of theory and empirical work”. Journal of Finance, 25(2), 383-417. Available from http://www.ideas.repec.org

Frenkel Jacob1976, “A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence,” Scandinavian Journal of Economics (May 1976);

Goodwin, G.P., & Johnson-Laird, P.N. (2005). Reasoning &relations. Psychological Reveiw, 112, 468-493.

Gunasekarage, A., Pisedtasalasai, A. and Power, D.M. (2004) Macroeconomic Influence on the Stock Market: Evidence from an Emerging Market in South Asia. Journal of Emerging Market Finance, 3, 285-304.

Hendry, D. F. 1986. Econometric modeling with cointegrated variables: An overview. Oxford Bulletin of Economics and Statistics 48(3) 201-212.

Irving, J. (2010). Recent bond issues on African countries‟ markets. July 5, 2013, From World Bank Blog, Prospects for Development

Islam, M. 2003. The Kuala Lumpur stock market and economic factors: a general-to-specific error correction modeling test. Journal of the Academy of Business and Economics.

Jansen, M. C & Meckling, W. H. (1976). ‘Theory of the firm: managerial behavior, agency costs and ownership structure’. Journal of financial Economics, 3, 305,-60

Junkin, K. (2012). Macroeconomic determinants of stock market behaviour in South Africa. Rhodes University. Retrieved from http: eprints.ru.ac.za/3658/

Johansen, S. & Juselius, K. 1988. Maximum likelihood estimation and inference on cointegration with application to the demand for money. Oxford Bulletin of Economics and Statistics 52: 169-210.

Karolyi, G.A.2001. “Why Stock Return VolatilityReally Matters”Paper Prepared for Inaugural Issue of Strategic Investor Relations, Institutional Investor Journals Series, February.

Kothari K. (2004). Research Methodology, Methods & Technique: New Age International

Kirui, 2014; Macroeconomic Variables, Volatility and Stock Market Returns: A Case of Nairobi Securities Exchange, Kenya

Krejcie, R.V. and Morgan, D.W. (1970). Determining Sample Size for Research Activities. Education and psychological measurement, 30, 607-176

Maghyereh, A. I. 2002. Causal relations among stock prices and macroeconomic variables in the small, open economy of Jordan. available at http://ssrn.com/ abstract=317539.

Mugenda, O. M., &Mugenda , A. G. (2003). Research Methods.Nairobi: Acts Press OxfordUniv Press.

Mukherjee, T. K. & Naka, A. 1995. Dynamic relations between macroeconomic variables & the Japanese stock market: an application of a vector error correction model. The Journal of Financial Research 18(2): 223-237

Muradoglu et al., 2000Causality between Stock Returns and Macroeconomic Variables in Emerging MarketsArticle · November 2000 DOI: 10.2307/27749553

Muthike, S. W., & Sakwa, M. M. (2012). Can macroeconomic indicators be used as predictors of the stock exchange index trends? A look at Nairobi stock exchange. In Scientific onference Proceedings. Retrieved from http elearning.jkuat.ac.ke/journals/ojs/index. php/jscp /article/view/731

Ngugi, Rose W. Ngugi1 & Justus Agoti2 2009 ,Microstructure elements of the bonds market in Kenya

NSE HANDBOOK 2013, Nairobi Stock Exchange Handouts on Bonds’ Trading & Settlement.Rules and Investor Education Prospectuses.

Okereke-Onyiuke, J. (2000). Portfolio Selection Efficient, Diversification of Investments. New York: John Wiley &Sons.

Onyango,P.O.(2004).Effects of Returns Announcement on Share Prices:A Study of NSE, Unpublished MBA Project.Nairobi University.

Ochieng, & Odhiambo. (2012). The relationship between macroeconomic variables and stock Market performance. University of Nairobi, Unpublished paper.

Osuala, E. C. (2005). Introduction to research methodology. Onitsha: African, First Publishers.

Ubulom, W. J. & Enyekit, E. O. (2001). Doing research in education: A fundamental Approach Port Harcourt: Celwil Publisher

Ross, S. (1973).’The Economic theory of agency: The principals problems’. American Economic

Ross, S. A. 1976. The arbitrage theory of capital asset pricing. Journal of Economic Theory 13: 341-360.

Jansen, M. C & Meckling, W. H. (1976). ‘Theory of the firm: managerial behavior, agency costs and ownership structure’. Journal of financial Economics, 3, 305,-60

Sharpe, (1964). Capital asset prices: A theory of market equilibrium under conditions of risk DOI: 10.1111/j.1540-6261.1964.tb02865

Shibira, G. K. (2003). Determinants of bond prices: A case study of Nairobi Stock Exchange. Egerton University MBA Publication, 13-22. 35

Sekaran, U. & Bougie, R. (2011).Research Methods for Business: A Skill Building Approach.5thEdition.Aggarwal printing press, Delhi, ISBN: 978-81-265-3131-8


Refbacks

  • There are currently no refbacks.