Macroeconomic Factors and Stock Return of Firms Listed at the Securities Exchanges in East Africa

Abstract

This study examined the relationship between macro-economic factors and stock returns of 96 firms listed in East African Stock Exchanges over the period 2016 - 2020. The macro-economic variables were foreign exchange rate, gross domestic product, interest rate and inflation rate. Regression analysis was used to examine the relationship between the variables. The results showed that foreign exchange rate negatively and significantly affects stock returns. The findings suggest that when the foreign exchange rate of a country increases, it negatively affects stock performance and thus the returns of stocks decrease. Policies should thus be put in place to ensure foreign exchange rate is kept constant or lower in order to attract investors and enhance stock returns. The results also showed that gross domestic product positively and significantly affects stock returns. The findings imply that when gross domestic product of a country increases, stock returns increase. Policies should be put in place that ensures growth in gross domestic product in order to enhance stock returns. The results also show that inflation rate negatively and significantly affects stock returns. The findings suggest that when inflation increases in a country it results in decrease in stock returns. Policies should thus be established to curb inflation and enhance stock returns. The results also show that interest rate negatively and significantly affects stock returns. The results imply that when the rate of interest increases in a country, stock returns decrease. Policies that ensure low interest rates should be put in place in order to boost stock returns. This study demonstrates that macroeconomic variables significantly affect stock returns. Therefore, we recommend that governments and other stakeholders should put in place proper macro prudential policies in order to encourage investments and boost stock returns. We also recommend that regulators and policymakers should come up with policies and regulations that will stabilize inflation, reduce or stabilize interest rates, stabilize or reduce exchange rates and also ensure growth in GDP. We suggest that future research may focus on data from developed and developing countries to compare and contrast the effect of macro prudential policies adopted in the various countries and its effects on stock returns.