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Impact of Foreign Portfolio Equity Investments on the Market Capitalization of the Nairobi Securities Exchange (2004-2013)

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dc.contributor.author Gathenya, James M
dc.date.accessioned 2015-08-07T09:54:48Z
dc.date.available 2015-08-07T09:54:48Z
dc.date.issued 2015
dc.identifier.uri http://erepo.usiu.ac.ke/11732/624
dc.description A Research Project Report by Gathenya James M, Submitted to the Chandaria School of Business in Partial Fulfillment of the Requirement for the Degree of Masters in Business Administration (MBA). en_US
dc.description.abstract The study investigates the effect of the Foreign Portfolio Equity Investments on the development of the stock market in Kenya for the period 2004 to 2013. The objective of this study was to empirically examine whether there exists a relationship between Foreign Portfolio Equity Investment (FPEI) and the market capitalization (MC) of the Nairobi Securities Exchange (NSE). Further, the study investigated the strength and direction of the relationship between FPEI and MC and also the nature of causality between the FPEIs and the growth of the NSE. The study employed the use of observation descriptive research whereby secondary data on Market Capitalization data from the CBK and the foreign Portfolio investment data from the World Bank (WB) was collected and later analysed using the SPSS software. The study was a census study using the market capitalization of all the listed companies in the NSE and the sum total of the FPEI made in all the listed companies at the NSE in any given year of study. The data is organized on yearly basis and used the Pearson Product Moment Correlation analysis, the simple linear regression and the cross-correlation analysis in establishing the nature, strength, direction and causality of the relationship between the market capitalization and FPEI. In addition the nature of causality between MC and FPEI was established using the cross-correlation tests. The study used the NSE Market capitalization values as the measure of the stock market development rather than constructing a composite index because market capitalization is a good proxy for such general development of the market and is less arbitrary than any other index. The study is important to the capital market regulators and the technocrats at the National Treasury since it provides better empirical evidence on the impact of FPEIs on the development of the NSE and such evidence can be used as a basis of developing policies and structures to ensure the development of the NSE is well-grounded and that sustainable growth of the capital market is achieved. The study is also important to the investors in the NSE as it provides empirical evidence of the relationship between the FPEIs and the development of the NSE thus ensuring that the investors are better equipped to make investment decisions. To the researchers and academicians, the study expands the body of knowledge on the relationship between the two. The results of the Pearson Product Moment Correlation analysis showed that there was a positive correlation between the FPEI and MC with the correlation coefficient (r) of 0.753 and with a p-value of 0.019, which is less than 0.05 meaning that the results were statistically significant. The findings on the correlation showed that, overall, there was a strong, positive correlation between FPEI and market capitalization which means that increases in the market capitalization were correlated with increases in FPEI and an increase in FPEI was correlated with an increase in MC. In addition the study showed that the FPEIs significantly determines the market capitalization since the results of the simple linear regression analysis of the FPEI and market capitalization data for the period 2004 to 2013 generated a coefficient of determination, R2, is 0.567; therefore we conclude that about 56.7% of the variation in MC is explained by variations in FPEI. In addition the results shows a constant (β0) of 574.199 and β1 of 2.134E-5 (0.00002132) and thus the estimation model generated was Y =574.199+0.00002132X where Y is MC and X is the FPEI figure for a given year. Further, the study shows that there is no causality relationship between market capitalization and the Foreign Portfolio Equity Investments as shown in the cross correlation. Based on the assumption that the series are not cross correlated and that one of the series is white noise, the cross-correlation test results show that there is only one significant cross-correlation at lag 0 i.e. there is no lag between MC and FPEI so the MC and FPEI figures for one variable do not impact the figures of the other variable for the subsequent periods. The study concludes that the FPEI is a major determinant in the development of the NSE and thus continuous and sustainable efforts should implemented to encourage more foreign investors to invest in the NSE. Such measures should be constantly reviewed to ensure necessary, up-to-date controls are in place to guard the NSE from any shocks from external economies which may affect the flow of FPEIs. On the impact of portfolio flows on stock market performance, the study concludes that portfolio flows are important in determining market returns as they lead to share price changes. Given that the stock market is liberalised, it is necessary to be cognisant of the implications of this on the stock market performance. Further, the study concludes that, for the period under study, the MC and FPEIs impact each other during the same period but they have no impact on each other during the subsequent period’s i.e there is no spill-over effect to the subsequent periods. The study recommends that due to the strong, positive correlation relationship between MC and FPEIs monetary authorities should ensure macroeconomic stability prevails, that there are favourable legal and taxation rules and that measures are put in place to ensure that inflows of short term capital are not disruptive as they lead to appreciation of the currency, making the country uncompetitive. The study also recommends that since no causality was found between FPEI and market capitalization, further research be conducted in this area covering a much longer period and using different tests such as the granger-causality test. en_US
dc.publisher United States International University - Africa en_US
dc.subject Foreign Portfolio en_US
dc.subject Investments en_US
dc.subject Market Capitalization en_US
dc.subject Nairobi Securities Exchange en_US
dc.title Impact of Foreign Portfolio Equity Investments on the Market Capitalization of the Nairobi Securities Exchange (2004-2013) en_US
dc.type Thesis en_US


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