FACTORS AFFECTING STOCK PRICES IN RWANDA.

This paper investigated dominant factors that affect stock prices in Rwanda. It specifically determined factors that affect stock prices in Rwanda and the direction of causality between stock prices and its determinants employing quarterly data spanning from 2011-2015. Having identified all the variables to be of the same order this study employed Johnsen cointegration test to assess long run relationship. The trace test tests the null hypothesis that there are at most r cointegrating relationships. In other words, a rejection of the null hypothesis means that there are more than r cointegrating relationships. The null hypothesis of two cointegrating relationships is rejected given that the trace statistics exceeds the critical value. The trace statistics (72.20544) exceeds the critical value of 69.81889 at 95 percent confidence level. The result confirms that there is three cointegrating relationship among the variables employed for the use of this study. The results from Maximum Eigen Statistics indicate that the eigenvalue test statistics (43.29838) exceeds the critical value (40.07757) at 95 percent confidence level. Hence, the failure to reject the alternative hypothesis indicates that there is two cointegrating relationship among the variables. These results confirm the presence of a long-run relationship between the explained variable and one of the explanatory variables. In order to determine the relationship between the variables under study, the study adopted ordinal least square (OLS) approach and the results presented indicate that the relationship between the stock price is affected positively (27.16009) at 5 level of significance by CPI (inflation) followed by money supply and interest rate at 5 percent and 10 percent level of significance respectively. Both interest rate and money supply affect stock prices negatively. Moreover, the co-efficient of determination indicates that only 74. 95 of change in stock prices could be attributed to changes in interest rate, dividend per share, money supply, consumer price index, real GDP and oil prices within the study period. Additionally, the F-statistic (0.011517) reveals that all these variables jointly and significantly affect stock prices in Rwanda. To determine the direction of causal relationship between stock prices and its factors in Rwanda Results from Grange causality reveals that independence of causality is suggested between stock prices with all the independent variables used in this study. Putting together these results, policy implications would be for the inflation authority in Rwanda (BNR) to continue taking appropriate policy measures to control inflation and hence inflation through continued better coordination complimented by effective communication with the public to reduce the impact of inflation inertia. Additionally, BNR should also take appropriate measures to tackle exchange rate movements to reduce inflation pressures on imported inflation for the great benefit for Stock Exchange through demand pull way of more investor in stock market, and supply push way of more extensional investment of companies. Moreover, we recommend further analysis of other variables (GDP, EPS, DPS and oil prices) with annual data and a bigger sample size.