Investigation of the Granger Causal Relationship Between Macroeconomic Variables and Stock Prices in Kenya
International Journal of Business and Economics Research
Volume 4, Issue 3, June 2015, Pages: 98-108
Received: Apr. 10, 2015;
Accepted: Apr. 16, 2015;
Published: Apr. 30, 2015
Views 5077 Downloads 179
Mohammed Mustapha Wasseja, Department of Business Administration, Chuka University,Chuka, Kenya
Elizabeth Njoroge, Department of Business Administration, Chuka University,Chuka, Kenya
Samwel N. Mwenda, ICT Department, Kenya National Bureau of Statistics, Nairobi ,Kenya
The aim of this paper was to analyze the causal relationship between macroeconomic variables and stock prices in the VAR(Vector Autoregressive) modeling framework using secondary time series annual data from 1980 to 2012. Sim's causality test based on Granger definition of causality was used to test the causality relationship while OLS (Ordinary Least Squares) is used to test for any significant relationship. According to Granger causality test results, it is evident that movement in the macroeconomic variables had no significant effect on stock prices except for inflation rate; exchange rate and change in stock prices also seem to be an insignificant factor explaining part of the movement in the macroeconomic variables except for market interest rates. Also, the regression test result shows that all the macroeconomic variables are jointly significant in explaining the variations in stock prices. Hence, the findings imply that the causality between macroeconomic variables and stock prices runs unilaterally or entirely in one direction from inflation rate and exchange rate to stock prices and from stock prices to market interest rates. Thus, there is evidence to show that inflation rate and exchange rate are the cause of movement on stock prices and stock prices are the cause of movement of interest rates in Kenya.
Mohammed Mustapha Wasseja,
Samwel N. Mwenda,
Investigation of the Granger Causal Relationship Between Macroeconomic Variables and Stock Prices in Kenya, International Journal of Business and Economics Research.
Vol. 4, No. 3,
2015, pp. 98-108.
Chen, N.-F. &. (A.S 1986). Economic Forces and the Stock Market. Journal of Business , 383 - 403.
Ehrmann, M. &. (2004). Talking Stock Monetary Policy Transmission to Equity Markets. Credit and Banking , 719-37.
Fama, F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. Journal of Finance , 25, 383-417.
Granger, C. (1969). Investigating Causal Relations by Econometric Models and Cross Spectral Methods (Vol. 37).
Jensen, M. (1969). The Performance of Mutual Funds in the Period 1945-1964. Journal of Finance 23 , 389-416.
Johansen, S. &. (1990). Maximum Likelihood Estimation and Inference on Cointegration with Applications to the Demand for Money. (Vol. 52). Oxford Bull. Econ. Stat.
Johansen, S. (1986). Statistical Analysis of Cointegration Vectors. Journal of Economic Dynamics and Control , 389-416.
Kisaka, S. &. The Causal Relationship between Exchange Rates and Stock Prices in Kenya. Journal of Finance and Accounting , 3.
Kovačić, Z. J. Forecasting Volatility: Evidence from the Macedonian Stock Exchange. International Research Journal of Finance and Economics (18 (2008)), ISSN 1450-2887.
Maghyereh, A. I. (2002). Causal Relations Among Stock Prices and Macroeconomic Variables in the Small, Open Economy of Jordan.
Malkiel, B. (1999). A Random Walk Down Wall Street. New York: Norton & Co.
Muthike S.W & Sakwa, M. M. (2011). Can Macroeconomic Indicators be used as Predictors of the Stock Exchange Index Trends? A Look at the Nairobi Stock Exchange. Nairobi: Jomo Kenyatta University of Agriculture and Technology.
Ochieng D. E. & Oriwo, A. E. (2012). The Relationship Between Macroeconomic Variables And Stock Market Performance In Kenya (Vol. 1). DBA Africa Management Review 2012.
Olweny, T. O. (2011). Stock market and Economic Growth, Empirical Evidence from Kenya using Causality Test Approach. Advances in Management & Applied Economics , 1.
Omran, M. (2003). Time Series Analysis of the Impact of Real Interest Rates on Stock Market Activity and Liquidity in Egypt. Co-integration and Error Correction Model Approach. International Journal of Business 8(3). , 8.
Porteba, J. &. (1986). The Persistence of Volatility and Stock Market Fluctuations, American Economic Review.
Sims, C. A. (1972). Money, Income and Causality. American Economic Review , pp. 540-552.
Vuyyuri, S. (2005). Relationship between Real and Financial Variables in India: A Cointegration Analysis.