Nairobi Securities Market Performance and Economic Growth Nexus in Kenya: A Predictive Analysis

Abstract

This study investigates the dynamic relationship between Nairobi Securities Exchange (NSE) performance and Kenya’s economic growth from 2010 to 2024. Key stock market indicators—including Nairobi All Share Index (NASI), Nairobi Securities Exchange 20 Share Index (NSE 20 Index), and trading volumes—were examined for their predictive influence on the growth of Gross Domestic Product (GDP) in Kenya, while accounting for inflation as a moderating factor. Using time-series econometric techniques, notably a Vector Error Correction Model (VECM), the study findings reveal four long-run equilibrium relationships among GDP growth, stock indices, and trading activity, confirming that capital market performance and economic growth are mutually reinforcing. While inflation is largely exogenous in the long run, it significantly moderates short-term market interactions, reflecting the context-dependent nature of market efficiency. This is consistent with the Adaptive Market Hypothesis (AMH) developed by Andrew Wen-Chuan Lo (2004) is viewed as a new version of the efficient market hypothesis, derived from evolutionary principles. Findings support Endogenous Growth Theory by highlighting feedback loops between financial markets and economic expansion. The study underscores the importance of policy, liquidity management, and institutional reforms in enhancing the NSE’s role as both a barometer and driver of Kenya’s economic resilience.

Keywords: Nairobi Securities Exchange, Economic Growth, Stock Market Performance, Vector Error Correction Model (VECM), Adaptive Market Hypothesis, Endogenous Growth Theory.

DOI: 10.7176/JESD/16-8-03

Publication date: November 30^th 2025