Macroeconomic Variables and the Kenyan Equity Market: A Time Series Analysis

Abstract

The study investigates the dynamic relationship between stock prices and four macroeconomic variables in Kenya using co-integration and vector auto regressive framework. The VAR and VECM analysis reveal 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.