Analysis Of The Long Run And Short-run Dynamic Relationship Between The Stock Prices And Exchange Rate In Kenya
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Date
2013Author
Mbungu, Stella Kainyu
Type
ThesisLanguage
enMetadata
Show full item recordAbstract
Stock markets in the world individually and collectively play a critical role in their countries’
economies. They provide an avenue for raising funds, for trading in securities including futures,
options and other derivatives which provide opportunities for investors to generate returns.
This study examines whether there is a long run and short-run dynamic relationship between the
stock prices and exchange rate in Kenya. The study also explores the direction of causation if a
long/short-run association is found. The objective is to establish the causal linkages between
leading prices in the foreign exchange market and the Nairobi Securities Exchange (NSE). In
particular the study uses monthly observations of the NSE 20 share index and the nominal Kenya
shillings per US dollar exchange rates as observed by the Central Bank of Kenya from January
1996 to December 2010. Specifically the study uses the monthly prices of the 20 Share index to
compute stock returns and the Kenya shilling/ Dollar ratios on a monthly average basis to
compute exchange rates which will be used to investigate the causal relationship using granger
causality test. The study employs cointegration and standard Granger causality tests based on the
vector auto correlative model to examine the long-run and short-run association between stock
prices and exchange rates. The unit root Augmented Dickey Fuller test is used to test the
stationarity condition for all the time series in the level and first difference. The Johansen cointegration
test is used to investigate whether foreign exchange rates and stock prices are cointegrated.
Finally a Granger causality test will be performed to find the direction of the
relationship between exchange rates and stock prices within the estimated model. The results
show that exchange rates Granger-causes stock prices in Kenya and in only that one way are the
two related that is a uni-directional causality relationship.
Publisher
School of Mathematics