Effects of Foreign Exchange Rate Fluctuation on Stock Returns Volatility: a Case Study of Nairobi Securities Exchange (Nse)

Abstract

This study sought to examine the effect of foreign exchange rate fluctuations on the stock return volatility on the Nairobi Securities Exchange, Kenya. It used monthly time series data covering the period 1996 to 2012. The study employed Exponential Generalized Autoregressive Conditional Heteroscedasticity (EGARCH) in the empirical analysis. Study findings reveal that Foreign exchange rate affect stock return volatility. The magnitude of volatility, as measured by β is relatively low though significant. The result of the study offers investors and policy makers a basis upon which to make strategic investment decisions. The study therefore recommends a policy that creates favourable foreign exchange market to ensure stability in the stock market