The relationship between interbank transaction volume and exchange rate volatility in the Kenyan Shilling against the US Dollar
The stability of exchange rate of a currency is an integral function of the overall economic performance of a country. This study sought to evaluate the effect of interbank transaction volumes on the exchange rate volatility of the Kenya Shilling against the US Dollar. The specific objectives were: to determine the causal relationship between interbank transaction volumes and exchange rate volatility of the Kenya Shilling against the US Dollar; to investigate the dynamic response of exchange rate to changes in interbank transaction volumes and to model exchange rate volatility. This study used secondary data for the period 2013 to 2017 from Central Bank of Kenya, Kenya National Bureau of Statistics and Thomson Reuters. The study used the Vector Error correction model to analyse the data. The findings of the study revealed that foreign exchange rate volatility and interbank trading volume are negatively related with no significant correlation between the variables. In addition, the study identified a negative relationship between interest rate and exchange rate volatility. The study recommends that the government should facilitate local manufacturing and production, which reduce reliance on imports arising from increased consumption of local products in the economy and increases exports. This would result in an improved balance of trade which in turn strengthens the local currency in relation to foreign currencies.