Cointegration Relationship Between Exchange Rate Volatility and Performance of Nairobi Securities Exchange Market, Kenya

Abstract

The stock exchange markets in developing countries are generally characterized as unstable and shallow. The current international integration of financial markets provides a channel for currency depreciation to affect stock prices, thus there is need to identify if there is any relationship between the two markets. Specifically the study seeks to determine the trend and correlation between the exchange rate and the NSE 20 share index; and establish empirically the long run relationship between the exchange rate and the NSE 20 share index. Based on the theoretical framework on “flow-oriented” and “stock-oriented” models of exchange rates, the study will be able to determine the relationship between the two financial markets. Exploratory and correlational research design was used. The target population consisted of all the 55 stocks listed at NSE as at December 2011 from which …