Equity Unit Trust Funds Flow and Stock Market Returns: Evidence from Kenya

Caroline Michere Ndei, Stephen Muchina and Kennedy Waweru
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Caroline Michere Ndei: Karatina University, Karatina, Kenya
Stephen Muchina: Karatina University, Karatina, Kenya
Kennedy Waweru: Department of Finance and Accounting, The Cooperative University of Kenya, Nairobi

International Journal of Finance & Banking Studies, 2019, vol. 8, issue 1, 21-36

Abstract: This study sought to evaluate the relationship between equity unit trust fund flows measured as purchases and sales and the Nairobi Securities Exchange (NSE) stock market return. The study employed Vector Autoregressive model and tested for Granger causality using monthly data for the period starting January 2010 to December 2017. The granger causality results showed that equity fund sales contain information that can explain stock market return and stock market return contain information that can explain equity fund purchases thus unidirectional causality. Impulse response results showed that equity fund purchases have a predominantly positive relationship with NSE stock market return and NSE stock market return have a positive relationship with equity fund purchases. This implies that an increase in stock market return will lead equityfund managers to purchase more securities and as the equity fund purchases increase, the demand for those stocks will increase causing the stock prices to increase and consequently increase stock market return. In contrast, equity fund sales are predominantly negatively related with stock market return and stock market return is also negatively related to equity funds sales. As the stock market return increase, the equity fund managers will decrease their sales. As the sales increase, the supply for those stocks will increase causing a decrease in prices and consequently a decrease in stock market return. Equity fund sales explain the variation in stock market return more than equity fund purchases while stock market return is a determinant of equity fund purchases and equity fund sales.

Keywords: Bank; Stock market return; Equity fund flows; Vector Autoregressive Model (search for similar items in EconPapers)
Date: 2019
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