Relationship between stock prices and exchange rates in the Nairobi Securities Exchange

Abstract

A country's Exchange rates implicate many factors in its economy, including the stock market. Research has been done to understand if there exists a relationship between exchange rates and stock prices. Previous researchers have arrived at contradictory findings. Researchers suggested doing more studies to see which findings are more consistent. This research has an objective of investigating the exchange rates and stock prices phenomenon to assess if stock prices in the Nairobi Securities All Share-Price Index (NASI) can be explained by the foreign exchange (FX) in the Nairobi Securities Exchange (NSE). The two variables of this research are Exchange Rates (FX) particularly the KSH against the USD (FX) and Nairobi Securities All Share - Price Index (NASI) Stock price indices which are seen to follow a times series pattern with volatility hence the employment of a suitable model. The research design is descriptive and a correlation and regression analysis was performed using Excel. The research study established that a negative and relatively significant relationship exists between exchange rates and stock market prices in the Nairobi Securities exchange.