Influence of High Cost of Living, Oil Price, Government Expenditure and Exchange Rate Effect on Stock Market Return Volatility. A Critical Literature Review

Abstract

Purpose: The financial services sector aims at creating a vibrant and globally competitive financial sector promoting high-levels of savings and financing for investment needs. The overall objective of this study was to examine influence of high cost of living, oil price, government expenditure and exchange rate effect on stock market return volatility. A critical literature review Methodology: The paper used a desk study review methodology where relevant empirical literature was reviewed to identify main themes and to extract knowledge gaps. Findings: The study also concluded that among the variables under study oil price, inflation, government spending and exchange rate, only exchange rate is significant in explaining the volatility in stock returns in Nairobi securities exchange. Positive shocks are associated with higher volatility than negative shocks. Policy makers should enhance exchange rate stability as well as making sure that inflation is suppressed so as to spur growth in the economy. Unique Contribution to Theory, Policy and Practice: The study recommends that the government should also increase production of energy locally so as to reduce over reliance on imported oil, reduce the cost of production as well as suppressing the rate of inflation in the economy. This study recommends that Policy makers, and investors, need to take the macroeconomic variables into account when formulating financial and economic policies which are necessary to encourage investment.