The effect of interest rate changes on the stock market

Abstract

The paper evaluates the existence and nature of the relationship between changes in interest rates and stock returns in Kenya with an aim to improve policy development and investment decision-making. This study uses the Central Bank Rate (CBR) as a representative of the . interest rates in the Kenyan economy and stock returns are used to represent the Kenyan stock market. This relationship is examined through the use of univariate and multivariate time series to determine stationarity and the long run and short run relationships respectively. All the variables used in this study are found to be stationary. The VAR model is used to determine the short run and long run dynamics of these variables and the results suggest that on the banking and the commercial sectors are affected by changing interest rates. The evaluation of a long' run .equilibrium relationship between changes in interest rates and the Kenyan stock market performance is found to be insignificant.