Effect Of Macroeconomic Variables On Portfolio Risk Of Commercial Banks Listed On Nse

Purpose: This study sought to establish the effect macroeconomic variables on Portfolio Risk of commercial banks listed on the NSE for the period 2004 to 2013 and sought to empirically establish the impact of interest rates, exchange rates and economic growth on portfolio risk in Kenya.Methodology:This study sought to establish the effect macroeconomic variables on Portfolio Risk of commercial banks listed on the NSE for the period 2004 to 2013 and sought to empirically establish the impact of interest rates, exchange rates and economic growth on portfolio risk in Kenya.The research used secondary quarterly data for 11 financial institutions listed at the NSE and adopted an explanatory research design. In order to achieve the stated objectives the research adopted a time series multivariate regression analysis.Results: The long-run model indicated that the 32 percent of the variation in portfolio risk was accounted by the changes in the independent variables. It was also found that the long-run Interest rate had a significant negative relationship while the long-run GDP growth rate had a positive and significant relationship. Engle-Granger Cointegration tests was performed and the empirical results indicated that the variables were cointergrated and a short-run was thus adopted. The short run model indicated that 52 percent of the short-run variation in portfolio risk was explained in changes in the short-run Interest rate, foreign exchange rate and GDP growth rate and that the short-runInterest rate had a negative and significant relationship with the short-run portfolio risk whereas the other variables in the short run were insignificant.Unique contribution to theory, practice and policy:The research concluded that despite the observed relationship between the variables policies designed should be meticulously be designed so as to maximize on the returns from investment in various portfolios as policies play a very crucial role in informing investors’ decision to undertake investment opportunities.