Selected macroeconomic indicators and stock market performance: an ARDL approach

Abstract

The market for securities significantly stimulates economic growth through financial intermediation, cost efficiency improvements, the market valuation process, and risk allocation. Stocks are among the most economically volatile assets, and any sudden change in stock prices can have a significant impact on an economy. The worldwide economic downturn has seen equity indices plunge, volatile currencies, and falling prices of essential commodities. Many African stock markets are facing challenges, primarily due to low external demand rather than weak internal fundamentals. The primary objective was to determine the short and long run relationships between selected macroeconomic indicators and stock market performance in Kenya using monthly time series data from January 2008 to December 2024. The ARDL model was employed, with inflation, lending interest rates, exchange rates, and foreign portfolio investment as independent variables. The money supply served as a control variable to account for its potential association with the NSE 20 Share Index, ensuring that underlying monetary conditions did not confound the observed relationships between the independent variables. The study found that lending interest and exchange rates have a significant short and long run relationship with the NSE 20 Share Index. Long-run ARDL results indicated a positive relationship with loan rates, with a coefficient of 317.18, suggesting that moderate adjustments in loan rates can enhance market performance. The short-run relations were negative with a coefficient of -53.99, indicating higher borrowing costs and decreased liquidity. Exchange rate depreciation had a consistently negative relationship with a long-run coefficient of -29.94 and a short-run coefficient of -17.19, degrading stock performance. The study recommends that CBK should carefully manage interest rates for stability and market growth, the government of Kenya should stabilize exchange rates, policymakers should uphold inflation targeting for price control, and CMA should create investor-friendly policies that attract and retain international investors.