THE EFFECT OF MACRO-ECONOMIC FACTORS ON STOCK RETURN VOLATILITY IN THE NAIROBI STOCK EXCHANGE, KENYA

The research study sought to investigate the effect of Macro-economic factors on the stock return volatility on the Nairobi Securities Exchange, Kenya. The study focused on the effect of foreign exchange rate, interest rate and inflation rate fluctuation on stock return volatility at the Nairobi Securities Exchange. It used monthly time series data for a ten years period between January 2001 and December 2010. Empirical analysis employed was Exponential Generalized Autoregressive Conditional Heteroscedasticity (EGARCH) and Threshold Generalized Conditional Heteroscedasticity (TGARCH). The main findings of the research study are as follows: the stock returns are symmetric but leptokurtic and not normally distributed. The results showed evidence that Foreign exchange rate, Interest rate and Inflation rate, affect stock return volatility. On foreign exchange rate, magnitude of volatility as measured by is relatively low at 0.209138 and significant since the probability isalmost zero, 0.3191. This implies that the impact of foreign exchange on stock returns is relatively low though significant. Volatility persistence as measured by was found low at -0.251925 and significant. This implies the effect of shocks takes a short time to die out following a crisis irrespective of what happens to the market. There was evidence of leverage effect as measured by λ, 0.6720. This means that volatility rise more following a large price fall than following a price rise of the same magnitude.