FACTORS INFLUENCING STOCK PRICES FOR FIRMS LISTED IN THE NAIROBI STOCK EXCHANGE

Joshua Makiya Aroni

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Financial Markets and Investment Strategies Financial Analysis and Corporate Governance Market Dynamics and Volatility

Abstract

This paper analyzes factors influencing stock prices for firms listed in the Nairobi stock exchange covering the period the period from January 2008 to December, 2010 using inflation, exchange rates, interest rates and money supply. The period is selected so as to use the most recent data, to make the findings more current. The study uses secondary data the main source of which is the NSE and the Central Bank of Kenya statistics. Multiple regression formula was applied to estimate effect of the selected factors on stock prices. The regression results show that the factors of inflation, exchange rates, and interest rates were significant except money supply which although it had a positive correlation, the relationship was not significant. The result shows that exchange and interest rates had negative correlation to stock prices whereas inflation and money supply had a positive correlation. Factor models observe the sensitivity of an asset return as a function of one or more factors. To formulate appropriate investment strategy, investors constantly review current financial and economic conditions, based on which future trends can be forecast considering the needs of the investors. However the financial market expectation will determine the investment strategy to be chosen. Financial markets are dynamic, and affected by various macroeconomic factors. The result of the study may offer investors and policy makers a basis upon which to make strategic decisions.

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References

1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1992The Cross-Section of Expected Stock Returns 2004Research Methodology: Methods and Techniques 1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]1986Economic Forces and the Stock Market 2006Empirical relationship between macroeconomic volatility and stock returns: Evidence from Latin American markets

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