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 equity fund 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.
