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Macro Economic Variables In Kenya Essay

2808 Words12 Pages

ABSTRACT
The study investigates the dynamic relationship between stock prices and four macroeconomic variables in Kenya using cointegration and vector autoregressive framework. The VAR and VECM analysis reveals that macroeconomic variables drive equity market in the long run. The variables in the VAR model are co integrated with 3.8% disequilibrium being corrected quarterly. Notably, inflation has a negative effect on equity market suggesting that policy authorities in Kenya should design polices that mitigate inflation for stock market to develop. The results confirm that stock market is not an avenue for perfect hedge against inflation.
Key words: stock market, VAR, VECM, Macroeconomic variables.

Introduction
The stock exchange plays a pivotal …show more content…

It was mandated to develop the stock market and regulate trading activities. The evolutionary process of the NSE can be divided into various developmental stages defined by specific institutional characteristics. Stage one is the initiation period before formalization of share trading (1920s-1953) while stage two (1954-1963) is the period when the market was formalized but before the political independence. The post-independence period which constitutes stage three (1964-1970) was the period before the Government made the first attempt to regulate the operations of the market. During stage four, the Government established the Capital Issue Committee (CIC) as a first attempt to oversee the operations of the stock market, (Ngugi, 2003). NSE has undergone gradual development marked by implementation of automated trading system in 2006, uploading of government bonds in the automated system in 2009 and becoming a member of the financial information service division of the software and information industry association. Currently, NSE accounts for over 90% of market activity in the East African region and is a reference point in terms of setting standards for the other markets in the region. As an emerging capital market, it has faced challenges to its development and growth such as economic depression and political uncertainty, among

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