The Effects of Exchange Rate Changes on the Stock Market Performance in the Nairobi Securities Exchange

Abstract

The general purpose of the study is to investigate the effects of changes in exchange rate on the performance of the Nairobi Securities Exchange. More specifically, the study sought to establish the percentage change in Kenya Shillings and US dollar exchange rate across a 5 year period, 2012 to 2016; assess the performance of the Nairobi Securities Exchange across a 5 year period, 2012 to 2016; and determine the effect of the changes in exchange rate change on the performance of the Nairobi Securities Exchange across a 5 year period, 2012 to 2016. The study took a descriptive research design. The study made use of secondary data collected from the Nairobi Securities Exchange covering the period January 2012 to December 2016 for both index movement and FOREX volatility. The study was interested in both primary data. Both descriptive and inferential statistics were conducted in data analysis. Descriptive statistics involved computation of frequencies, percentages, and standard deviation and cross tabulations. Inferential statistics then involved both correlation and linear multiple regression analyses. Findings indicate that foreign exchange movement was on average unstable across the 60 month period running from January 2012 to December 2016. The movement was highest in May 2012 at 4.34%, then in July 2015 at 3.94%. The sharpest decline was recorded in October 2015 at -3.32%, with the period from November 2015 to December 2016 stabilizing between 031% and 0.03% respectively. The performance of Nairobi Securities Exchange market can be described as both unpredictable and on the decline as the case observed from January 2012 to December 2016. A generally declining trend was observed in NSE performance as indicated by the All Share Index across the period January 2012 to December 2016. A similar declining trend was recorded in the performance of the Nairobi Securities Exchange across the period January 2012 to December 2016, as indicated by the percentage change in the NSE 20 Share Index as was with the All Share Index. Results from both the Pearson's partial correlation and regression analyses reveal a weak and negative associations between exchange rates and the performance of the Nairobi Securities Exchange as measured by both the NSE 20 share index and the NSE All Share Index. The weak and negative relationship between exchange rate movement and financial performance of the Nairobi Securities Exchange may reflect how fluctuating and volatile exchange rate may have contributed to the declining trends observed in both the NSE All Share and 20 Share Indices? Based on the foregoing findings, the study concludes that foreign exchange movement was on average unstable across the 60 month period running from January 2012 to December 2016. Given the frequent changes of supply and demand influenced by numerous external and internal factors, this new system is responsible for currency fluctuations. The study also concludes that the performance of Nairobi Securities Exchange market can be described as both unpredictable and on the decline as the case observed from January 2012 to December 2016. These fluctuations can be attributed to the flexible exchange rate system whereby the price of currency is determined by supply and demand of the currency in the forex market. The study further concludes that there exists a weak and negative associations between exchange rates and the performance of the Nairobi Securities Exchange as measured by both the NSE 20 share index and the NSE All Share Index. The weak and negative relationship between exchange rate movement and financial performance of the Nairobi Securities Exchange may reflect how fluctuating and volatile exchange rate may have contributed to the declining trends observed in both the NSE All Share and 20 Share Indices. This may be attributed to the fact that many imports are paid by the NSE listed firms using the dollar and, with the shilling weakening against the dollar the firms are recording arbitrage losses. Based on the foregoing findings and therefore conclusions, the study recommends that the issues related to foreign exchange trading should always be taken into account in efforts to improve listed firms' foreign exchange transactions and explore avenues to enhance capacities within firms for managing foreign currency risk exposure. It is also recommended that listed firms ought to explore the course of continuous short term training and education which ought to be adequately practical as opposed to theoretical. The same can involve the consultation of professional institutions comprised of bankers, finance specialists, consultants and accountants