Abstract

Purpose

This study examined the effect of interest rates on sectoral return volatility at the Nairobi Securities Exchange (NSE). Existing studies in Kenya have largely relied on aggregate market indices, which mask sector-specific volatility dynamics and differences in sectoral responses to macroeconomic conditions.

Design/methodology/approach

The study was guided by Fisher Effect Theory and adopted a positivist philosophy and causal research design. The analysis covered 10 sectors and 47 firms listed at the Nairobi Securities Exchange using monthly data from 2011 to 2024. Sectoral return volatility was estimated using the Generalised Autoregressive Conditional Heteroskedasticity model.

Findings

The findings showed that interest rates have statistically significant, heterogeneous effects on sectoral return volatility. Interest rates significantly influenced volatility across five sectors, indicating that sectoral responses to monetary conditions differ across sectors.

Research limitations/implications

The study focused on sectoral return volatility at the NSE, using the GARCH-X model, and provides a basis for future studies employing asymmetric and regime-switching volatility models.

Practical implications

The findings support institutionalised monitoring of sectoral volatility and the development of sector-specific indices to strengthen market surveillance and investment decision-making.

Originality/value
The study extends existing literature by providing sector-level evidence on the relationship between interest rates and return volatility at the NSE.

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