The causal relationship between the stock market and foreign direct investments - evidence from Kenya

Abstract

The paper aims at investigating the nature of the causal relationship between Foreign Direct Investments and the Stock Market index in Kenya. The relationship has proved to be significant enough to solicit an empirical relationship. The Granger Causality test as proposed by C. J. Granger in 1969 and later redefined by Toda and Yamamoto in 1995 is applied in the study. For the test to be conducted stationarity must be proven, therefore the study adopts 2 methods to test for stationarity; The Augmented Dickey-Fuller (ADF) and The Phillips-Perron tests. The panel data is for the period 1990-2014. Data on the Stock Market Index was obtained from the NSE website and data on Foreign Direct Investments will be obtained from the World Bank website. The results from the study showed no causal relationship between the 2 variables studied.