Dynamics of asset prices in monetary policy; A case study of Kenya.

Abstract

This study examines the extent to which stock returns are linked to interest rate, money supply and exchange rate in Kenya from 2000 to 2018, using GARCH (1,1). Some unanticipated results were uncovered, ultimately contributing to the existing body of literature, and illustrating how different markets respond to different stimuli. The most substantial was the significant positive relationship between stock returns and interest rates. A relationship that can be explained by the Keynesian hypothesis based on a sticky price model. In line with theory results revealed a negative and significant relationship between exchange rates and stock market price returns. Also, the study revealed a significant relationship between stock returns volatility and interest rates