INFLATION AND FINANCIAL PERFORMANCE OF EQUITY MARKET IN NAIROBI SECURITIES EXCHANGE, KENYA
Keywords:
Inflation, Equity Market, Financial Performance, Nairobi Securities Exchange, Producer Price IndexAbstract
The financial performance of the equity market at the Nairobi Securities Exchange (NSE) is a critical barometer for Kenya's economic health and capital formation. Inflation, a persistent macroeconomic challenge, is theorized to significantly influence stock returns, yet its specific impact within the unique context of Kenya's emerging market remains inadequately explored. This study investigated the effect of inflation on the financial performance of the equity market at the NSE, Kenya. Guided by Fisher’s Hypothesis, the Efficient Market Hypothesis, and the Capital Asset Pricing Model, the research employed an explanatory design. A census of all 67 firms listed on the NSE All-Share Index was conducted, with secondary panel data collected from annual reports and economic surveys over the period 2018–2023. Financial performance was measured by the Market Return Index (MRI), while inflation was operationalized through the Producer Price Rate (PPR), Wholesale Price Rate (WPR), and Food Price Rate (FPR). Data were analyzed using correlation and panel regression techniques. The random effects regression analysis revealed that all three inflation measures had a statistically significant negative effect on market performance. Specifically, the Producer Price Rate (β = -0.382, p=0.001), Wholesale Price Rate (β = -0.283, p=0.006), and Food Price Rate (β = -0.206, p=0.033) were all inversely related to the Market Return Index. The overall model was significant (Prob > chi2 = 0.000) and explained 20.5% of the variation in financial performance. The study concludes that inflation acts as a systematic risk factor that erodes equity market returns on the NSE, contradicting the hedging premise of Fisher’s Hypothesis in this context. It recommends that investors adopt inflation-hedging strategies, corporate managers implement robust cost controls, and policymakers prioritize macroeconomic stability to foster a resilient capital market.
DOI: https://doi.org/10.5281/zenodo.17874464
CITATION: Onyango, F. A., & Ngureh, J. (2025). INFLATION AND FINANCIAL PERFORMANCE OF EQUITY MARKET IN NAIROBI SECURITIES EXCHANGE, KENYA. Journal of Accounting and Finance Research, 2(2), 1–14. https://doi.org/10.5281/zenodo.17874464
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Copyright (c) 2025 Fenny Akinyi Onyango, Dr John Ngureh
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