Effect of Interest Rate and Exchange Rate on Stock Market Returns in Uganda

ABSTRACT This study investigated the effect of interest rate and exchange rate on stock market returns in Uganda by analyzing monthly interest rate, exthange rate and stock indices from the Bank of Uganda, and Uganda Securities Exchange for the period ranging from January 2006 to December 2015. The study employed ex-post-facto research design. The study adopted descriptive analysis and regression models in analyzing the data. The results of descriptive analysis show that the mean of lending interest rate, Shilling!USD exchange rate, and USE returns are 21.5%, 2301.3 shilling, 1160 respectively. The standard deviation values for the series show wide dispersion between the minimum and maximum values from their averages. The skewness coefficients show that all the series are positively skewed. The results of inferential statistics using regression models revealed that interest rate has a significant negative effect on stock returns in Uganda at the 5% sigi~ificance level. The results further show that exchange rate has significant positive effect on stock returns in Uganda at the 5%. significance level. It was therefore concluded, amongst others, that interest rate has negative effect on stock returns in Uganda, and that exchange rate has positive effect on stock returns in Uganda. The study consequently recommends that stock market investors should include interest rates and exchange rates stock valuation models as well as watch changes in interest rates and exchange rate so as adjust stock portfolio in accordance with such changes. It was further recommended that the regulators of the financial market should monitor changes in interest and exchange rates so as to formulate proactive policies to stabilize the market whenever there is expectation shocks from the variables.