The Determinants of Stock Returns in the Emerging Market of Kenya : An Empirical Evidence

This study examined the determinants of stock returns for the emerging market of Kenya: The Nairobi Securities Exchange. The specific objectives were to establish if certain selected macroeconomic variables affect stock prices in Kenya, to examine the validity of the Capital Asset Pricing Model (CAPM) in the Kenyan market and to determine the sources of risk factors priced in stock returns in the Kenya market.The study finds evidence to suggest that there indeed exist a long-run equilibrium relationship between the selected macroeconomic variables and stock prices. Unexpected inflation is found to have a negative, but statistically insignificant long-run equilibrium relationship with stock prices in Kenya. Money supply has a negative and statistically significant long-run equilibrium relationship with stock prices. The exchange rates and short term interest rates are both found to have positive and statistically significant long-run relationships with stock prices. Further, the study finds evidence to suggest that excess market premium (β) is statistically significant as a source of the risk factor for the Kenyan market. The macro variables are found to be statistically insignificant