Effects of Selected Macroeconomic Variables on Market Capitalization of Nairobi, Kenya

Abstract

This study examined the effects of selected macroeconomic variables on the market capitalization of the Nairobi Securities Exchange in Kenya during the period 2010- 2022, based on the Arbitrage Pricing Theory (APT) using quarterly data. The autoregressive distributed lag model technique was applied to test how market capitalization was affected by the macroeconomic variables. Gross domestic product, money supply, and inflation were stationary at the level while interest rate, market capitalization, and exchange rate became stationary at first difference. From the empirical results, no co-integration between market capitalization and exchange rate, money supply, interest rates, Gross domestic product, and inflation was found by use of bounds test. Money supply and inflation had a weak influence on market capitalization; interest rate, Gross Domestic Product, and first lag of the exchange rate were positive and affected market capitalization, while the exchange rate at the current level affected market capitalization negatively. It was concluded that macroeconomic variables affect market capitalization. The study recommends that the government need to put up relevant policies that increase gross domestic product. Policymakers need to consider macroeconomic variables during policy formulation on market capitalization.