Impact Of Foreign Exchange Rate On Stock Prices Of Listed Companies On Nairobi Securities Exchange In Kenya

Interaction between foreign exchange rate market and stock market plays a vital role in determining the health of any financial system across the world.Many researches have tried to determine the impact of foreign exchange rate on the stock market since it is one of the major macro-economic variables in any economy.To determine the effect of foreign exchange rate on the stock prices;scholars,researchers and academicians have applied different methodologies.Theoretically,foreign exchange rate fluctuations cause stock prices movements-flow-oriented theory(Dornbusch and Fisher,1980).The causality is unidirectional i.e.exchange rates “Granger cause” stock prices.In addition,stock-oriented theory asserts that stock prices cause the exchange rate.The study sought to establish the impact of foreign exchange rate on the stock prices of listed companies on Nairobi Securities Exchange in Kenya.Quarterly time series data from 2003 to 2018 was used.NSE-20 index was used as a proxy to measure the stock prices and macro-economic variables;inflation rate,interest rates and economic growth rate were identified as the major determinants of stock prices in an economy in addition to foreign exchange rate variable.The study applied the Autoregressive Distributed Lag(ARDL)model to determine the existence of cointegration between exchange rate and stock prices.In addition,the long-run model analysis was done to determine the marginal effects of foreign exchange rate and other macro-economic factors on the stock prices.The empirical results according to ARDL bounds testing finds a long-term relationship among the exchange rate,inflation rate,interest rate,economic growth and stock prices which converges in the long-run as indicated by the negative sign of coefficient of Error Correction Model(ECM).Granger Causality Test results show a negative unidirectional causal relationship between foreign exchange rate and stock prices.In addition,long-run model analysis revealed that exchange rate has negative impact on the stock prices at 5 percent significance level.In addition,the long-run model analysis finds that macro-economic factors: inflation rate,interest rates and economic growth rate are statistically insignificant at 5 percent significance level.