Effects of Interest Rate on Stock Market Returns in Kenya

Abstract

Debate on the stochastic behaviour of stock market returns, 3-month Treasury Bills rate, lending rate and their cointegrating residuals remains unsettled. This study examines the stochastic properties of the macroeconomic variables, stock market returns and their cointegrating residuals using an Autoregressive Fractionally Integrated Moving Average (ARFIMA) model. It also investigates Granger causality between the two measures of interest rate and stock market returns. The study uses monthly data from 1st January 1993 to 31st December 2015. The results indicate that the 3-month Treasury Bills rate, lending rate and stock market returns are fractionally integrated which implies that shocks to the variables persist but eventually disappear. The results also reveal that the cointegrating residuals are fractionally integrated which suggests that a new and harmful long-run equilibrium might be established when each of the measures of interest rate is driven away from stock market returns. Additionally, the results indicate that the 3-month Treasury Bills rate and lending rate negatively Granger cause stock market returns in the long run. This suggests that stocks and Treasury Bills are competing investment assets. On the other hand, ARFIMA-based Granger causality reveals that stock market returns lead the 3-month Treasury Bills rate and lending rate with a negative sign in the short run. This implies that a prosperous stock market results into a favorable macroeconomic environment. A key contribution of this study is that it is the first to empirically examine fractional cointegration and ARFIMA-based Granger Causality between interest rate and stock market returns in Kenya.

Do Macroeconomic Variables Affect Stock Market Performance? A Case Study of DSEX and DS30 Index of Dhaka Stock Exchange

“…In terms of disjoint effect, amongst all the explanatory variables, while copper expenditures and pastime quotes have a large influence, in the long run, copper expenditures and change fees can have an effect on the stock market overall performance in the quick run. Otieno et al (2017) examined how activity price affects inventory market returns in Kenya gathering month-to-month records from 1st January 1993 to 31st December 2015 and employing ARFIMA and Granger causality model. The end result indicated that macroeconomic variables -3-month T-bill, lending fee are partially integrated with stock market returns.…”

Assessing the Impact of Monetary Policy on Stock Returns at Ghana Stock Exchange

“…For example, (Liu and Shrestha, 2008;Ullah et al, 2014;Tursoy et al,2008) realized that rates of interest prevailing in an economy affects stock market return. (Otieno, 2017) discovered that consumer price index and currency movements have a negative bearing on stocks in Kenya. (Modise, 2013) also found out that interest rates predict stock returns in South Africa.…”

Reaksi Pasar atas Pengumuman Suku Bunga the Fed pada Sektor Perbankan yang Terdaftar di Indonesia

“…Jadi dapat dikatakan bahwa pengumuman kenaikan tingkat suku bunga acuan oleh The Fed (Fed Fund Rate) tidak menyebabkan pergerakan atau memberikan pengaruh terhadap abnormal return sektor perbankan di Indonesia yang terlisting di BEI. Penelitian (Mehta, Jain, & Yadav, 2014) , (Ekapriyani, 2010), (Rokhman, Affandy, & Kiptiyah, 2009), (Bruno et al, 2018), (Otieno, Ngugi, & Wawire, 2017), dan (Fajarwati & Nurasik, 2021) menyimpulkan bahwa tidak terdapat perbedaan yang signifikan antara rata-rata abnormal return sebelum dan sesudah peristiwa pengumuman suku bunga. Tidak adanya perbedaan karena ada kecenderungan mengadopsi strategi wait and see.…”