Exchange Rate Fluctuations and Stock Returns in Uganda Securities Exchange

ABSTRACT 

The purpose of this study was to examine the effect of the exchange rate fluctuations on stock returns in Uganda Securities Exchange (USE). The objectives of this study were to determine the effects ofexchange rate fluctuations on stock returns, in both cross-listed companies and local-listed companies in USE, using the Jorion ‘s model and panel data regression. Although empirical and anecdotal evidence suggest two types of results: a group ofauthors found the effect of exchange rate movements on stock returns; then, another group did not found that effects. The preliminary analysis from the USE monthly returns and nominal exchange rates, for January 1, 2014 to April 30, 2018 period, shows positive skewness, leptokurtosis, and nonnormal distribution. The findings of this study revealed a significant effect of exchange rate movements on stock returns in USE. Howevei~ level and even direction of this effect differ across companies listed on USE. The exchange ratefluctuations had a negative and significant effect on stock returns of the cross-listed companies but there was not a significant effect of that exchange movement on the local-listed companies. All estimations for the whole period and whole companies listed in USE revealed a negative and significant effect between exchange rate and stock returns due to the cross-listed companies with Kenyan stock market. Negative exposure coefficient suggests that ifthe exchange rate moves by one unit, the stock returns in USE decrease by the amount ofthe coefficient ofexchange rate factor. The highest exchange exposure is observed in case of Cross-listed companies. Basing on these findings, the study concluded that exchange rate fluctuations have a negative and significant effect on the stock returns in USE. The recommendations wereformulated regarding thesefindings such as the Bank of Uganda could define the proactive monetary policy to manage the price dynamics and to reduce the nominal interest rate because in the long run the exchange rate fluctuations cannot be controlled through the USE interventions. The USE’s system could reduce the information asymmetry within the stock market~, protect the small-scale investors and increase the number ofthe companies listed on it in the sense to reduce the negative effect of the exchange rate fluctuations on its stock returns. In all~ this study has advanced the literature in understanding the mechanisms through which exchange ratefluctuation affects a stock return in Lower developed countries. The Uganda ‘s stock market is vulnerable of the exchange rate fluctuations due to the cross-border companies with USE. The findings ofthis study joined the group of studies that have found a negative effect of the exchange rate fluctuations on stock returns.

TABLE OF CONTENTS

DECLARATION I

APPROVAL II

DEDICATION III

ACKNOWLEDGEMENT Iv

TABLE OF CONTENTS V

ACRONYMS VIII

LIST OF TABLES IX

LIST OF FIGURES X

ABSTRACT XI

CHAPTER ONE 1

INTRODUCTION 1

1.0. Introduction 1

1.1. Background to the study 1

1.1.1. Historical perspective 1

1.1.2. Theoretical perspective 3

1.1.3. Conceptual Perspective 4

1.1.4. Contextual Perspective 5

1.2. Problem statement 6

1.3. Purpose of the study 7

1.4. Objectives of the study 7

1.5. Research questions 7

1.6. Hypotheses 8

1.7. Scope of the study 8

1.8. Significance of the study 9

1.9. Operationalization of key terms 10

CHAPTER TWO .11

LITERATURE REVIEW 11

2.0. Introduction 11

2.1. Theoretical review 11

2.1.1. Efficient Market Hypothesis (EMH) 11

2.1.2. International Fisher Effect (IFE) 15

2.2. Conceptual Review 17

2.2.1. Exchange rate, exchange rate fluctuation and exchange rate regime 17

2.2.2. Stok Return 20

2.2.3. Stock market return and Market index (Return on market portfolio) 21

2.3. Empirical review 23

2.4. Research Gaps 26

CHAPTER THREE 27

METHODOLOGY 27

3.0. Introduction 27

3.1. Research design 27

3.2. Nature of source of Data 27

3.3. Sample period 28

3.4. Model specification 28

3.5. Measurement of variables 29

3.6. Data analysis 30

CHAPTER FOUR 35

DATA PRESENTATION, ANALYSIS AND INTERPRETATION 35

4.0. Introduction 35

4.1. Descriptive statistics 35

4.2. Preliminary tests on data 36

4.3. Panel regressions 40

CHAPTER FIVE .44

DISCUSSIONS, CONCLUSIONS, AND RECOMMENDATIONS 44

5.0. Introduction 44

5.1. Discussion ofmajor findings 44

5.2. Conclusion 46

5.3. Recommendations 47

5.4. Limitations of the study 49

5.5. Contribution to knowledge 49

5.6. Areas of further research 50

REFERENCES 51

APPENDIXES i