www.ijbcnet.com International Journal of Business and Commerce Vol. 3, No.11: July 2014[01-31] (ISSN: 2225-2436) Published by Asian Society of Business and Commerce Research 1 THE IMPACT OF MACROECONOMIC VARIABLES ON STOCK MARKET RETURNS IN KENYA Wycliffe Nduga Ouma Department of Commerce and Economic Studies, Jomo Kenyatta University of Agriculture and Technology, Nairobi Kenya wicalda@gmail.com Dr. Peter Muriu Senior Lecturer, School of Economics, University of Nairobi, Kenya pmuriu@gmail.com ABSTRACT This study investigates the impact of the macroeconomic variables on stock returns in Kenya during the period 2003- 2013, using the Arbitrage Pricing Theory (APT) and Capital Asset Pricing Model (CAPM) framework for monthly data. The Ordinary Least Square (OLS) technique is applied to test the validity of the model and the relative importance of different variables which may have an impact on the stock returns. The empirical analysis found two interesting results. First, all variables are I(0). Second, with the exception of interest rates, there exists a significant relation between stock market returns and macroeconomic variables. According to the findings of the study, Money Supply, exchange rates and inflation affect the stock market returns in Kenya. Money supply and inflation are found to be significant determinants of the returns at NSE. Exchange rates is however, found to have a negative impact on stock returns, while interest rates is not important in determining long rung run returns in the NSE. Key Words stock market returns, Nairobi Securities Exchange,Ordinary Least Square (OLS), Arbitrage Pricing Theory (APT), and Capital Asset Pricing Model.