The Effect of Exchange Rate Movement on the Performance of the Nairobi Securities Exchange

Abstract

The increasing level of integration progressively amongst the international foreign exchange and equity markets has led to an increased scholarly interest in stock prices in relation to exchange rate and. This has in turn led to the increasing influx of alien investors in both the foreign exchange and Nairobi Securities Exchange markets in Kenya, it would be thus of much interest to explore how foreign exchange rate changes have impacted the stock market performance in Kenya. Much of the studies that have been done in Kenya have focused majorly on NSE listed entities‘ performance and how they are affected by foreign currency fluctuations. This study sought to take a departure and analyse the effect of exchange rate movement (shilling dollar parity) on NSE Market performance while taking into account the movement in the major indices. The study used a descriptive design as well as a longitudinal design to attain the objectives of the research. The variables being investigated are the NSE All and 20 Share Indices and Foreign Exchange Rate. The researcher utilized secondary data sourced from the Central Bank of Kenya (CBK) rates and statistics and Nairobi Securities Exchange. The stock index data was be obtained from NSE reports while the exchange rate data was obtained from the CBK rates and statistics report. The data set for the study consisted of monthly data observations covering the period December 2010 to August 2016 for both index movement and FOREX volatility. The data distribution decided on was monthly to guarantee an acceptable quantity of observations. The data was modelled in time series. The data was analysed using both the Statistical Package for Social Sciences and Microsoft Excel Spreadsheet. The results of the model are presented using tables in order to display the effect of the independent variable (Exchange Rate) on the specific dependent variables NSE All and 20 Share Indices. Correlation and Regression analyses were utilized in analysing the data collected. Albeit not statistically significant, results from both the Pearson‘s partial correlation and regression analyses reveal weak and negative associations between the Nairobi Securities Exchange Market Performance as measured by both the NSE All and 20 Share Indices, controlling for interest rates and inflation