The Effect of Exchange Rate on Stock Market Performance in the Nairobi Securities Exchange

Abstract

Exchange rates are encountered by humanity in different aspects of life since time in memorial. The current paper analyzes the impacts of exchange rate changes on stock market performance in the Nairobi Securities Exchange (NSE). The study used descriptive research design on the population of 65 companies listed in the NSE for the period between December, 2006 and December 2016. It applied the census inquiry. Accordingly, it used time series data, the daily stock market prices data which was sourced from the NSE 20 share index and then averaged to monthly data, monthly exchange rate, inflation rate, interest rate 91-day treasury bill rate) and money supply which were sourced from the CBK and KNBS official websites. The secondary data was analyzed using the Augmented Dickey Fuller Test (ADF), which found that the time series was stationary. Granger causality test showed that there is a causal relationship from exchange rate on the stock market performance but no causal relationship from stock market performance on the exchange rate changes. The correlation analysis result show that there is a significant negative relationship between exchange rate and stock market performance, a significant inverse relationship between inflation rate and stock market performance, an insignificant positive relationship between stock market performance and interest, then lastly an insignificant negative relationship between money supply and stock market performance. Regression analysis indicates that returns are highly affected by other external factors other than the independent factors in the study. EGARCH showed that exchange rate changes has a leverage effect on the stock market performance. Descriptive statistics indicated that securities market returns had a negative mean and a positive standard deviation. Exchange rate, Interest rate, Inflation rate, and money supply have a positive mean. In Jarque-Bera test, all the variables, did not meet the conditions for normal distribution s=0 and k=3. Therefore, the study, concluded that Exchange rate has a negative effect on stock market returns in NSE. The study recommended that Capital Market Authority should understand the effect of exchange rates changes and implement sound policy which will steer development in financial markets by containing adverse exchange rate change levels. A further study can be done to establish the contribution of different macro-economic factors when it comes to the returns allied to stock markets.