The impact of foreign exchange rates and foreign exchange reserves on the performance of Nairobi stock exchange share index.
Abstract. The aim of this study was to at examine the impact of foreign exchange rates and foreign exchange reserves on stock markets performance at NSE. Monthly time series for NSE share index, foreign exchange rates and reserves covering the period 2003-2010 were used. Multiple regression analysis techniques were employed to ascertain long run relationships between the variables. The study was guided by several theories including market efficiency theory, classical monetary, portfolio theory and empirical studies from India, Ghana and Kenya. The study concludes that Foreign exchange rates and foreign exchange reserves had an impact on the stock performance at NSE. Foreign exchange rates had negative impact on stock performance which was more significant. Foreign exchange reserves had positive mpact on stock performance which was significant. The study also revealed that no significant relationship between Foreign exchange rates and foreign exchange reserves. The study also shows NSE efficiency is not yet strong even with increased flow of information at capital market. Further research area can be extended by analyzing more fundamentals of the Kenyan economy and the stock markets. The major implication of this study can be for government to use the conclusion to address the fluctuations of the foreign exchange rate as the empirical result indicate that it has negative impact in the stock market hence the whole economy. This can be managed by government through central bank to influence the supply side of exchange rates by using foreign exchange reserves. Future studies should broaden the study in more than one country, across regions or within economic blocks e.g. East African community countries in order to draw stronger conclusions.