An evaluation of the relationship between oil price and the share prices of manufacturing companies listed in the Nairobi Securities Exchange
Bett, Gilbert Kiprono
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This is a study of the relationship between Oil price and the Share price of manufacturing companies listed in the Nairobi Securities Exchange. The theoretical rationale is that Share price is the discounted sum of expected future cash-flows. Oil prices being a key component affecting future expected cash flow and the impact of Oil prices is therefore inevitable. This empirical study puts that economic theory to test using data from 2005 to 2014 within the context of the listed manufacturing companies. First the paper tests for traditional linear cointegration using the 1990 Johansen Co-integration test. Then it applies the Granger Causality test to determine the direction of the relationship. There’s some evidence to support the long run relationship between the two variables within some of the companies. Amongst those that displayed a long run relationship between the variables, there’s also evidence that the Oil price movement granger causes the Share price movements. These mixed results may have been impacted by the unique business and industrial processes run by the individual companies. The paper concludes that while there’s evidence for oil price changes impacting the Share Prices, there’s a need to understand why other companies within the industry aren’t impacted. Outcome of the study advises the actions of management and portfolio managers in as far as their response to changes in oil prices are concerned.