Kenya has experienced continuous exchange rate
volatility since October 1993 when the fixed exchange rate regime was abolished
and floatation of the Kenya shilling was introduced. The continuous volatility
of exchange rate brings about increase in foreign exchange risk exposure which
in turn leads to increase in transaction costs of companies. Higher transaction
costs lower the expected earnings of companies which subsequently affect the
market price of stocks hence, the value of companies and the investors’ wealth.
Stock prices represent returns which investors expect from a given security.
Hence, variables that cause stock prices to change are of importance to
investors and the economy at large. Changes in stock prices and the trend of
changes have always been of interest in the capital market given their effect
on the stock market stability and strategies adopted by investors. The stock
market plays a vital role of intermediation between borrowers and lenders hence
uncertainty in the market impacts negatively to the economy. For the period
2007 to 2014, Kenya experienced high exchange rate volatilities which affected
the performance of the Nairobi Securities Exchange. Stock market performance is
key in determining if investors’ portfolio of stocks will bring adequate
returns based on their expectations. Therefore, variables that influence the
performance of the stock market are important to investors, stockbrokers, and
the regulatory authorities. This study examined the interaction between foreign
exchange market and the stock market in Kenya, with the aim of identifying the
effect exchange rate volatility on stock prices of companies listed in Nairobi
Securities Exchange. Further, the study sought to establish the moderating
effect of selected monetary policy variables on the relationship between
exchange rate volatility and stock price movement in Kenya. The study employed
an explanatory non-experimental research design. A census of 61 companies
listed in the Nairobi Securities Exchange, was taken. The study utilized
monthly data for the period of 96 months from January 2007 to December 2014.
Pairwise Granger causality test revealed that causality runs from exchange rate
volatility to stock prices. Regression analysis results revealed the existence
of statistically significant negative relationship between daily mean exchange
rate, monthly mean exchange rate, and combined drivers of exchange rate
volatility on stock prices of companies listed in Nairobi Securities Exchange.
However, regression results revealed that inflation rate had insignificant
negative relationship with stock prices. The moderating monetary policy
variables were tested using the stepwise multiple regressions. Stepwise
regression results revealed that there is significant moderating relationship
between combined drivers of exchange rate volatility and stock prices of
companies listed in the NSE. Therefore, monetary policy variables have a
moderating effect on the relationship between drivers of exchange rate
volatility and stock prices in Kenya. The study recommends that Capital Markets
Authority should fast-track the establishment of Derivatives Exchange Market in
Kenya. The derivative instruments help economic agents to improve their
management of both market and credit risks hence increasing the market
resilience to shocks. The establishment of derivatives market will further
boost attraction of both domestic and foreign participation at the Nairobi
Securities Exchange thereby benefiting all sectors of the economy.
AfroAsia, R (2021). Exchange Rate Volatility And Stock Prices Of Companies Listed On Nairobi Securities Exchange, Kenya. Afribary.com: Retrieved June 24, 2021, from https://afribary.com/works/exchange-rate-volatility-and-stock-prices-of-companies-listed-on-nairobi-securities-exchange-kenya
Research, AfroAsia. "Exchange Rate Volatility And Stock Prices Of Companies Listed On Nairobi Securities Exchange, Kenya" Afribary.com. Afribary.com, 06 Jun. 2021, https://afribary.com/works/exchange-rate-volatility-and-stock-prices-of-companies-listed-on-nairobi-securities-exchange-kenya . Accessed 24 Jun. 2021.
Research, AfroAsia. "Exchange Rate Volatility And Stock Prices Of Companies Listed On Nairobi Securities Exchange, Kenya". Afribary.com, Afribary.com, 06 Jun. 2021. Web. 24 Jun. 2021. < https://afribary.com/works/exchange-rate-volatility-and-stock-prices-of-companies-listed-on-nairobi-securities-exchange-kenya >.
Research, AfroAsia. "Exchange Rate Volatility And Stock Prices Of Companies Listed On Nairobi Securities Exchange, Kenya" Afribary.com (2021). Accessed June 24, 2021. https://afribary.com/works/exchange-rate-volatility-and-stock-prices-of-companies-listed-on-nairobi-securities-exchange-kenya