Share Prices – Exchange Rates Nexus: Evidence from Kenya

Abstract

Kenya adopted a floating exchange rate regime in 1993. In the years that followed the exchange rates are market driven. Undoubtedly, the changes in exchange rates do have a diverse effect across the economic spectrum in any country. The sectoral and economy wide effects of exchange rates may ultimately be reflected in the share prices.

The objective of this research was to study share price and exchange rate nexus. The context of the study is Kenya for the period November 1993- April 2011. The findings have implications for investors, investment managers, regulators, listed companies, financial institutions and other market players. The economic theory points to the relationship between stock price and exchange rates but does not properly define the direction of the relationship.

The research used the procedure proposed by Toda and Yamamoto to determine the share price and exchange rates nexus. The outcome of the research suggests that there is bi-directional causal relationship between share price and exchange rates. Besides, the sign of causality is negative and causality exists in both directions.

Keywords: Share prices, Exchange rates, Modified WALD test