The effect of stock price volatility on bank loan dynamics: a case of Kenya

Abstract

The study seeks to evaluate dynamic linkages between stock prices and bank lending behavior prevalent in Kenya. As such the focal variables are loans to the private sector and share prices. However, because of the existence of common macroeconomic cyclical factors that may drive both variables, the study also uses other control variables i.e. price level (CPI), exchange rates and interest rates (interbank lending rates). The study employs the use of a VAR model with monthly data collected from the year 2005 to 2016. A unit root test and a cointegration test to check for stationarity and cointegration among variables respectively are also used. The findings are useful in explaining whether there is a causal relationship between adverse share price movement and bank lending in Kenya.