The relationship between commercial bank’s lending rates and Asset prices in Kenya

Abstract

The paper evaluates the existence of a relationship between the lending rates and asset prices in Kenya with an aim of improvement in the policy development. The asset classes are divided into two with the Stock prices constituting one segment while Exchange rates constitute the other. The relationship is examined through the use of univariate and multivariate time series. The univariate time series helps in the evaluation of stationarity of the variables and the stock prices are found to be stationary while lending rates and exchange rates are non-stationary. With the multivariate time series, long run and short run relationships are evaluated. The evaluation of a long run equilibrium relationship between stock prices and lending rates is nullified, as well as the existence of a short run relationship between the two variables. The other asset class portrays the presence of long run equilibrium relationship and unidirectional causality between exchange rates and lending rates, with the exchange rate Granger Causing Lending rates.