MODERATING EFFECT OF INFLATION RATES ON THE RELATIONSHIP BETWEEN FOREIGN EXCHANGE RATES AND STOCK PRICES IN THE KENYAN CAPITAL MARKET
Abstract
There has been a downward trend in the equities market with NSE 25, NASI, and NSE 20 declining by 9.9%, 3.5%, and 5.7% respectively from 2012 to 2015 and 2017. Ever since the Shilling was allowed to float freely, the unpredictability of Nairobi’s exchange market has been largely observed and in 2006 February, the index in NSE 20-Share rose to 4057, 2007 January it went further to 5774, but in February 2009 it hit a low of 2475. The drop went further in 2011 by 27%. This brought about losses to investors for example in 2009 when brokerage firms collapsed. This has led to a loss of confidence in investors in the Nairobi Securities; and for this reason, researchers have to come in and work together to find ways of stabilizing our stock market. This research seeks to add value to the literature by analyzing whether the regulation of the interaction of inflation rates with exchange rates on stock prices will stabilize the undesirable situation. Stock market plays an important role of intermediation in the economy and enhancing investors’ confidence in the market can have a positive impact on resource allocation hence economic growth. Reviewed literature has found the effects both in the short-run and the long-run. The disparity of their results might be attributed to different countries that are being analyzed on different capital mobilities, economic links, trade volumes, and methodologies among others. This study established the moderating effect of inflation rates on the relationship between foreign exchange rates and stock prices. The study is built on the theory of stock prices. The research adopted a correlational research design. Time series monthly secondary data was collected from January 1998 to December 2018. Multivariate analysis was employed. The 2-step hierarchical regression which resulted in an R2 change of 3% was fairly a good increase in the predictive capacity for stock price changes. The study therefore concluded that Inflation Rates moderate the relationship between stock prices and exchange rates and recommends that the Central Bank of Kenya as the regulator and Capital Markets Authority (CMA) should consider formulating favorable policies to manage Inflation rates as it is an investment driver in the economy.
JEL: E31; D53; E44
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DOI: http://dx.doi.org/10.46827/ejefr.v8i1.1626
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