Monetary policy and financial markets: an econometric analysis on the impact of monetary policy on the stock market performance
Date
2015
Authors
Ongwae, Dennis Kembero
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
The study attempted to investigate the effect of monetary policy on the stock market performance in Kenya using quarterly data over the period of March, 2000 to December 2012. The objective of the study was to estimate the impact of monetary policy on the stock market performance. The study employed the GARCH (1, 2) volatility model in the estimation of this effect. The dependent variable, the real unrealised yield of the NSE-20 index was chosen as a proxy for the stock market performance with the CBR rate, change in Reserve Money, Real GDP, Foreign Exchange rate and the 91-day T-Bill rate as the explanatory variables. Our model effectively showed that at a 5% significance level, the mean equation showed that changes in Reserve Money as our monetary policy variable and the volatility term are positively statistically significant in its impact on the performance on the stock market. The 91-day T-Bill rate and the Foreign Exchange rate were found to be negatively statistically significant in their impact on the stock market performance. As for the variance equation of the model, the ARCH (1) term is not statistically significant at a 5% level while the GARCH (2) is statistically significant at 10% level. Moreover, employing the co integration technique it was observed that in the long run a 1% increase in CBR, change in Reserve Money, Real GDP, 91-day T-Bill Rate and Foreign Exchange Rate contributes to a 65.18% decrease, 19.155 increase, 26.48% decrease, 54.27% decrease and 52.56% increase in the NSE-20 index yield respectively. The ECM model indicated that a 5.801% deviation of the NSE-20 index from its long run equilibrium level is corrected each period in the short run.