INFLUENCE OF MACROECONOMIC VARIABLES ON GOVERNMENT BOND PERFORMANCE AT NAIROBI SECURITIES EXCHANGE IN KENYA
Abstract
This study sought to evaluate influence of inflation, interest rate and foreign exchange on government bond market at the NSE. The study used bond index provided by FTSE to measure the performance of government bond. The study adopted quantitative research design, with the population under study consisting of all Kenya government bond issued and traded at the NSE between the periods of January 2012 and December 2018 a period characterized by financial markets growth and innovation. The study used Secondary data which was obtained from Central Bank of Kenya, Nairobi securities exchange, International Monetary Fund and Kenya national bureau of statistics for the purpose of analysis. These data was averaged quarterly and analyzed using E-views and the result presented by use of graphs and tables in a more comprehensive manner for easy interpretations. The study used Autoregressive Distributed Lag (ARDL) to test for cointergration while Error correction Model was used to run the regression equation. Augmented Dickey fuller (ADF) was used to test stationary of variables, while Jarque-Bera was used to check normality. Based on the findings, the study established that the macroeconomic variables were found to be satisfactory in determining bond market index, supported by R squared of 65%. However the ARDL test revealed long run relationship between bond and interest rate. The trend analysis and Error correction OLS regression (ECM) indicated that interest rate and inflation rate were negatively and significantly related to bond performance. While exchange rate was positively and insignificantly related to bond prices. The study therefore concluded that interest rate, inflation rate and exchange rate affected bond market performance. The study therefore recommended prudent monetary policy in respect to inflation, interest rates and stability of exchange rate to support Bond performance. The study further suggested investigating other variables the affect bond prices since R-squared was not 100%.
Key Words: Inflation, Interest Rate, Foreign Exchange, Government Bond, Nairobi Stock Exchange
CITATION: Kwamuma, P., & Weda, C. (2019). Influence of macroeconomic variables on government bond performance at Nairobi Securities Exchange in Kenya. The Strategic Journal of Business & Change Management, 6 (2), 1012 –1029.
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DOI: http://dx.doi.org/10.61426/sjbcm.v6i2.1168
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