The Relationship Between Foreign Investment Activity and Market Return at the Nairobi Securities Exchange

Abstract

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.