ABSTRACT
The exits of purchasing power parity stipulates that different countries differ in prices for
goods when a common digit is applied and therefore, random changes in exchange rate has
often been implicated to be the key cause of fluctuations in prices leading to more risk in the
assets pricing models. This implies that Exchange rate is a crucial variable that affect both
the international competiveness of both multinationals and investor’s wealth as they
participate in international stock markets. It then follows that investors and other players who
participate by investing in stocks at the Nairobi Securities Exchange are not exceptional and
therefore, this research seeks to empirically ascertain effects of the pricing of foreign
exchange risk on stock returns on listed securities trading at Nairobi Securities Exchange,
Kenya. The study covered a period of ten years starting from January 2003 to December
2012, with specific interest being to determine the degree at which inflation rate differential
affected stock returns at Nairobi Securities Exchange, to examine the magnitude at which
interest rate differential affected stock returns at Nairobi Securities Exchange and to analyze
the extent to which current account deficit affected stock return at the Nairobi Securities
Exchange. This research therefore employed monthly time series data while adopting the use
of Unconditional three factor international arbitrage pricing model which formed the
backbone on which the empirical model was based on. Moreover, all the sixty one (61) listed
securities on Nairobi securities Exchange formed the population of this study. However by
employing inclusion - exclusion criteria for survivorship biasness, only those securities that
were in trade for the entire period formed a sample of thirty six (36) securities summing up to
(59.02%) of the entire population. Empirically this study made use of linear regression
equations that is orthogonalized based on actual values of the underlying factors. However,
the researcher adopted the use of Generalized Method of Moments estimation technique to
empirically analyze the data corresponding to the entire period under the study. This was
supported with inbuilt E–Views computer software for data analysis. Since Generalized
Method of Moments posits many advantages that make it free from Ordinary Least Square
problems. It then follows that, by employing the services of Generalized Method of
Moments, the data was presented in form of figures and tables with much emphasis being on
descriptive analysis, testing of normality, stationarity and the prevalence of Ordinary Least
Square problems. Using F and t– Statistics, Null hypothesis was tested at 5% confidence
levels. This study is of critical use to academicians as it forms a foundation for future studies,
to economists to draw implications of macroeconomic policy, investors to allocate
appropriate risk level to their investment opportunities in Kenyan securities market as well as
by multinational firms in diversifying their portfolio risk globally. The result revealed that
foreign exchange risk was weakly priced and there existed a long run relationship between
the interest rate differential and abnormal return, Current account deficit and Interest rate
differential and between Interest rate differential and inflation rate differentials respectively.
This meant that policy makers should consider regulating the interest rates and capping the
inflation rate since they affect the purchasing power negatively. Moreover the CBK should
consider empowering other currencies like Euros, yen, sterling pounds to diversify the impact
of currency risk and integrate the Nairobi Securities Exchange to rest of the world securities
markets.
MUSE, M (2021). Effect Of The Pricing Of Foreign Exchange Risk On Stock Returns At Nairobi Securities Exchange, Kenya. Afribary. Retrieved from https://tracking.afribary.com/works/effect-of-the-pricing-of-foreign-exchange-risk-on-stock-returns-at-nairobi-securities-exchange-kenya
MUSE, MMBAYIZA "Effect Of The Pricing Of Foreign Exchange Risk On Stock Returns At Nairobi Securities Exchange, Kenya" Afribary. Afribary, 01 Jun. 2021, https://tracking.afribary.com/works/effect-of-the-pricing-of-foreign-exchange-risk-on-stock-returns-at-nairobi-securities-exchange-kenya. Accessed 23 Nov. 2024.
MUSE, MMBAYIZA . "Effect Of The Pricing Of Foreign Exchange Risk On Stock Returns At Nairobi Securities Exchange, Kenya". Afribary, Afribary, 01 Jun. 2021. Web. 23 Nov. 2024. < https://tracking.afribary.com/works/effect-of-the-pricing-of-foreign-exchange-risk-on-stock-returns-at-nairobi-securities-exchange-kenya >.
MUSE, MMBAYIZA . "Effect Of The Pricing Of Foreign Exchange Risk On Stock Returns At Nairobi Securities Exchange, Kenya" Afribary (2021). Accessed November 23, 2024. https://tracking.afribary.com/works/effect-of-the-pricing-of-foreign-exchange-risk-on-stock-returns-at-nairobi-securities-exchange-kenya