The Effect Of Foreign Portfolio Investments On Stock Market Performance At The Nairobi Securities Exchange

Abstract

While the role of foreign investments in the development of a country’s securities market is often touted in policy, there is inconclusive evidence on the effect of foreign portfolio investment on stock exchange performance due to the conditional nature of economic characteristics of the recipient country. The objective of the study was to establish the effect of foreign portfolio investments on the stock performance at the Nairobi Securities Exchange. Owing to the presence of other indicators influencing stock market performance, the effect of control variables (exchange rates, interest rates, market capitalization) on the relationship between foreign portfolio investments on the stock performance was also examined. A descriptive research design was adopted for the study. Secondary data was collected from the NSE and CBK databases. The data comprised of the monthly Net Foreign Investors Transactions for Foreign Portfolio Investment, NSE All Share Index (NASI) for stock market returns, market capitalization, exchange rates (KSH/USD) and interest rates. The monthly data covered a 10-year period (2009-2018). Collected data was cleaned and taken through diagnostic tests: logarithmic transformation, Augmented Dickey-Fuller (ADF) tests for unit roots, and autocorrelations. Linear regression models were developed to estimate the relationship between foreign portfolio investments and stock market performance from the transformed dataset. In the absence of control variables, regression coefficients indicate that foreign portfolio investments had a positive and statistically significant effect on stock market performance. When control variables were added to the regression model, findings revealed that foreign portfolio investment had a negative, but not statistically significant effect on stock market performance. Exchange rate and interest rates had a negative and statistically significant effect on stock market performance, while market capitalization had a positive and statistically significant effect on stock market performance. The study recommends a sound monetary and fiscal policy framework if the country is to reap the benefits of foreign capital inflow in the long run.