The Relationship Between Foreign Investment Activity and Market Return at the Nairobi Securities Exchange
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Date
2014-10Author
Kariguh, Bilha W
Type
en_USLanguage
enMetadata
Show full item recordAbstract
Foreign investment activity in the stock markets have been encouraged through
liberalization with the main aim of improving market activity and access to foreign
capital. A good understanding of the effect of foreign investor’s activity on stock market
performance is therefore important in assessing the role that it plays in the domestic stock
market given the concern that such activities may destabilize the fragile markets
especially at times of crisis (Pavabutr & Yan, 2003).
This study used a descriptive research design since the study was seeking to determine
the relationship between foreign investment activity and market returns at the NSE. The
foreign investment activity was measured by the monthly foreign investor trade turnover
for the period 2008-2013. In this research a dynamic econometric model was employed to
assess the relationship between foreign investment activity and market return at NSE.
The study found that increased foreign investor participation in the stock market is likely
to push up share prices and result in increased returns. The NASI Index to foreign
investor’s turnover is positively correlated to the market return. An increase in foreign
investor turnover shows that foreign investors have a reasonable level of confidence in
the domestic market and this pushes market return up.
Whether and how foreign investors activity impacts a stock market is important for local
investors, regulators, and decision makers, as foreign investors have always been major
players in markets, especially in emerging markets. The results on the relationship
between foreign investor activity and market returns at the NSE show that stock market
return is driven up by the amount of foreign investment in the market and hence affects
the performance of the market. The implication is that foreign investor activities push
stock prices up when they come in which may be due to increased demand.
The presence of positive and significant relationship between foreign investor’s activity
and stock market returns depicts existence of positive feedback trading and correlation
between foreign investor’s activity and returns.
Publisher
University of Nairobi