The Conundrum of Stock Market Performance and Gross Domestic Product: An Empirical Evidence from Kenya
Downloads
The main objective of this study was to establish is the difficult question among researchers on the direction of relationship between the stock market performance and the gross domestic product using an empirical evidence from Kenya. Both theoretical and empirical reviews have presented a puzzle especially in the long run relationship between the two variables and empirical investigations in various country contexts , time varying longitudinal periods and other settings have continued to provide conflicting results. The study employed quarterly statistics of the Nairobi All Share Index (NASI) obtained from the Capital Markets Authority Bulletins and quarterly Gross Domestic Product rates from 2012-2019 obtained from Kenya National Bureau of Statistics and applied the Engle granger causality test and establish the link between stock market performance and economic growth in the long run (i.e. whether stock market performance causes economic growth or itself is a consequence of increased economic activity). The statistical techniques used included the unit root Augmented Dickey Fuller (ADF) test in order to test the stationarity for all the time series in their levels and first differences. The Johansen co-integration test to investigate whether the variables are cointegrated of the same order taking into account the trace statistics and the maximum eigen-value tests. The data was transformed into natural logarithms and normalized for further analysis. Both GDP and NASI were found to be stationery at level and upon first difference after ADF tests. The findings were that there was none directional/No causal relationship between the two variables after conducting a pairwise granger causality test, however there was a significant cointergrating equation on the variables, signifying the long run relationship between the two variables. From the results, it was inferred that the movement of stock prices in the Nairobi stock exchange reflect the macroeconomic condition in the long run of the country and can therefore be used to predict the future path of economic growth however the puzzle continues on causality.
Adenuga A. O. (2010), Stock Market development indicators and economic growth in Nigeria (1990-2009): Empirical investigations. Central bank of Nigeria, Economic and Financial Review, 48(1).
Alejekwu Udoku and Achugbu Austin (2012),The role of stock market development and economic growth in Nigeria: A time series analysis. African Research Review, Vol6 (1), 51-70.
Ateyobi Kehinde et al (2013). Capital market and economic growth: An empirical analysis. IOSR Journal of Humanities and social sciences, 6(6), 60-68.
Bamurange Pamela et al (2019). Influence of selected Macroeconomic factors on stock market performance in Kenya. Journal of Finance and Accounting, Vol. 3, (2), 1-24.
Barasa J. Wanjala (2014). Macroeconomic determinants of stock market performance in Kenya: A case of Nairobi Securities Exchange. Unpublished MSc. Project, University of Nairobi.
Bencivenga V. and Smith B. (1991). Financial intermediation and Endogenous growth. Review of Economic studies 58 (2), 195-209.
Calderon C. & Liu L.. (2002). The direction of causality between financial development and economic growth Working Papers, Central Bank of Chile
Capital Market authority (2018). Annual Report and Financial Statements.
Charkravartv. S,. (2005). Stock market and macroeconomic behaviour in India. Institute of Economic Growth. Delhi. India
Comincioli Brad (1996), The Stock Market as a leading indicator: An application of Granger Causality. The University Avenue Undergraduate Journal of Economics, Sample issue.
Cooper D.R and Pamela P.S (2011). Tata McGraw-Hill Publishing Company, New Delhi, India.
Cutler D.M. et al, What moves stock prices? Journal of Portfolio Management, 15(3), 4-12.
Cytonn (2018). Why stock indices performance differ: A case study of NASI vs NSE 20. Retrieved from https://cytonn.com/topicals/why-stock-indices-performance-differ-a-case-study-of-nasi-vs-nse-20
Dada S. Obafemi et al (2012), Robust Application of the Arbitrage Pricing Theory and the Test for Volatility in the stock market: Evidence from Nigeria. Research Journal of Finance and Accounting, vol 12, No.4.
FTSE Russell.
https://www.ftse.com/Analytics/Factsheets
Granger C.W (1969). Investigating Causal Relations by Econometric models and Cross Spectral methods. Econometrica, 37, 424-438.
Harris. K . (1997). Stock Markets and Development. A Re-assessment European Economic Review. Vol 41. Pp 139-46
Ikikii Stephen M. and Nzomoi N. Joseph (2013). An analysis of stock market development on economic growth in Kenya. International Journal of Economics and Finance, Vol. 5, No. 11, 145-151.
Johansen Søren and Juselius Katarina. (1990). Maximum Likelihood estimation and inference on co-integration-with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52, 2, pp 169-210.
Jugu Yohanna and Amodu Yunisa (2014), Capital Asset Pricing Model and Arbitrage Pricing Theory: A comparative Analysis.
Kaimba I. Karigu, Relationship between Nairobi Securities Exchange 20-Share Index and selected macro-economic variables. Unpublished MBA project, 2010.
Kamunde Lawrence Kaburu (2012). Analysis of the relationship between market capitalization and stock market indices at the NSE. Unpublished MBA project.
Koszegi Botond and Rabin Matthew (2006). A model of reference-dependent preferences. Quarterly Journal of Economics, Vol CXXI, Issue 4, 1133-1165.
World Bank (1996). Stock market development and long-run growth. Policy research working paper (1582).
World Bank (2012). Kenya Economic update, Walking on a Tightrope Rebalancing Kenya’s economy with a special focus on regional integration. World Bank.
Karungu R. et al (2019). Effects of securities behaviour on performance of Nairobi Securities Exchange indices. Research Journal of Finance and Accounting, Vol. 9, No. 14.
Kenya National Bureau of Statistics (2009, 2013, 2016, 2019), Economic Survey Highlights. Government of Kenya.
Kinyae A. Mwangangi (2013), Economic Performance Indicators and Stock Returns at the Nairobi Securities Exchange. Unpublished MBA project.
Kirui et al (2014). Macroeconomic variables, volatility and stock market returns: A case of Nairobi Securities Exchange, Kenya. International Journal of Economics and Finance. Vol. 6, (8), 214-228.
Kori K. Mutweta (2018). Macroeconomic variables and their effect on stock market returns in Kenya. Unpublished MBA project, United States International University- Africa.
Levine, R. & Zervos, S. (1996). Stock market, banks and economic growth. A policy working paper. New York: World Bank WPS1690/ 1996.
Levine Ross and Zervos Sara (1998). Stock markets, banks, and economic growth. The American Economic Review, 88(3), 537-558.
Lo Andrew (2004), The Adaptive Market Hypothesis: Market efficiency from Evolutionary perspective. Journal of Portfolio Management, 30(5), 15-29.
Lo Andrew (2016). What is an index? Journal of Portfolio Management, 42(2), 21-36.
Mogambi N. Monica (2017). The effectiveness of the NSE 20 share index in representing the overall market performance at the Nairobi Stock Exchange.
Muhamad Kamran et al (2018). Stock market development and Economic growth: Evidence from Pakistan. Journal of Business and Tourism, 04 (12), 21-38.
MSCI Barra (2010). Is there a link between GDP growth and equity returns? MSCI Barra Research Bulletin.
Ndede C. Otieno et al (2017). An assessment of the effects of Nairobi Securities Exchange (NSE) 20 share index. International Journal of Economics, Commerce and Management. Vol. V, Issue 10, 161-191.
Ngare E. et al (2014). Stock market development and economic growth in Africa. Journal of Economics and Business, Vol. 74, 24-39.
Njenga E. Nyanaro (2016). The relationship between stock market performance and economic growth in the East Africa Community. Unpublished MSc. Project.
Nairobi Securities Exchange. The History of NSE. https://www.nse.co.ke/nse/history-of-nse.html
NSE (2014). Annual Report and Financial statements.
NSE (2018). Investors Handbook 2017-2018.
Ochieng D. Elly and Oriwo E. Adhiambo (2012). The relationship between Macroeconomic variables and Stock market performance in Kenya. DBA Review. Vol. 3, (1), 38-49.
Odera J. Odhiambo (2000), Determining the Accuracy of the Nairobi Securities Exchange 20- Share Index. Unpublished MBA project.
OECD, Main Economic Indicators. http://www.oecd.org/daf/investmentfordevelopment
Okumu N. Agatha and Onyuma O Samuel (2015), Testing Applicability of Capital Asset Pricing Model in the Kenyan Securities Market. European Journal of Business and Management, vol.7, 126-133.
Olweny O. Tobias and Kimani Danson (2011). Stock Market performance and economic growth. Empirical Evidence from Kenya using Causality Test Approach. Advances in Management & Applied Economics, 1 (3), 153-196.
Onyango P. Arogo (2010),The relationship between stock market liquidity and economic growth in Kenya. Unpublished MSC project.
Osho A. Ejededawe (2014), Role of stock market on Nigeria’s economic development. International Journal of Scientific and research publication, 4(4).
Osoro Cliff and Jagongo Ambrose (2013), Investors Perspectives on the NASI and NSE 20- Share Index as performance measurement indicators at the Nairobi Securities Exchange in Kenya. International Journal of Humanities and Social Sciences, 3 (18), 153-162.
Oyewo B. Michael and Oyewole O. Sharon (2014). Financial system, financial inclusion and economic development in Nigeria. International Journal of management sciences, Vol 2, No. 3, 139-148.
Ragheb Mohamed et al (2016), Arbitrage Pricing Model; Determining the number of factors and their consistency across markets. International Journal of African and Asisan Studies, vol. 24, 42-64.
Rurangwa Gerard and Shukla Jaya (2017). Capital market development and economic growth: Evidence from Rwanda. International Journal of Economics, Commerce and Management, V (10), 507-517.
Shabbaz et al (2013), Macroeconomic determinants of stock market capitalisation in Pakistan: Fresh Evidence from Cointgration with unknown structural breaks. Munich Personal RepEc Archive, paper No.52490.
Sharma Dipasha (2015). Nexus between financial inclusion and economic growth. Evidence from the emerging Indian economy. Journal of Financial economic Policy, vol. 8 No. 1, pp13-36.
Shaw and McKinnon. R.I.. (1973). Money and Capital in Economic Development, The Brookings Institution. Washington. DC, 1973
Seyyed. A.. (2010). Emerging Stock Market Performance and Economic Growth. American Journal of Applied Sciences. Vol 7, No. 2. Pp. 265-69
Shleifer A. and Vishny R. (1997) A survey of corporate governance Journal of Finance, 52(2).
Waithaka J. Njuguna (2014). The effectiveness of the NSE 20 share index in representing the overall market performance at Nairobi Securities Exchange. Unpublished MBA research project, University of Nairobi.
World Bank (2015). World Bank Development Indicators.
