The Effect of Exchange Rate Volatility on Market Returns at the Nairobi Securities Exchange
Abstract
Foreign exchange rate volatility has implications on the economic activities of any country since
it affects the importation and exportation of goods and services by firms. In addition, foreign
investors shift funds to markets whose prices are fair or undervalued and have a potential for
high returns. This may ultimately be reflected in the market returns. The study sought to examine
the effects of exchange rate volatility on the market returns at the Nairobi Securities Exchange
over the period January 2007 to December 2016. The study used secondary data from the
websites of the Nairobi Securities Exchange and the Central Bank of Kenya. The study
employed multiple regression model and correlation analysis. On the one hand, the NSE 20 share
index was the dependent variables while on the other hand the macroeconomic fundamentals
namely foreign exchange volatility, monthly average interest rate and monthly inflation rate were
the dependent variables. The economic theories postulate a relationship between exchange rate
volatility and market returns but do not conclusively define the direction of the relationship. The
study established that foreign exchange volatility, average interest rate and average rate of
inflation explain 14.22% change in market returns. The study further established that foreign
exchange volatility has a positive but insignificant relationship with the market returns. The
average monthly rate of inflation has a negative and significant relationship of 36.26% change in
market returns implying investors shift resources from the market when inflation increases. The
study further established that the monthly average rate of interest has a negative but significant
relationship of 23.89% with market returns meaning investors shift from securities to interest
bearing investments such as bonds. The findings also established that the Kshs had depreciated
gradually against the USD over the period of study and this may have had adverse implications
on businesses and the general economy
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
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