The Relationship Between Domestic Investment Activity and Market Returns at the Nairobi Securities Exchange

Abstract

Domestic investor activity is key to spur growth in the stock market in a country. Domestic investors in a country’s stock exchange are necessary to cushion the bourse against the uncertainties that are associated with foreign capital flight that occurs when the returns in the bourse are not satisfactory to the foreign investors. A good understanding on the role that domestic investors play is important to a local market in order to gauge their capacity to stabilize the market in the event that foreign investors are no longer stimulated by the return that the local market generates. Due to the numerous risks and the fragile nature of stock markets in the emerging markets, their appetite for investments is seasonal and the foreign investor will pull their investments out if the markets do not generate satisfactory returns. Thus there is need for a robust domestic investor base to sustain the momentum in the stock market and help to mitigate against the shocks that are associated with foreign capital flight. This study used a descriptive research design since the study was seeking to determine the relationship between domestic investment activity and market returns at the NSE. The domestic investment activity was measured by the monthly domestic investor trade turnover for the period 2010-2014. In this research a dynamic econometric model was employed to assess the relationship between foreign investment activity and market return at NSE. The study found that domestic investor participation has a negative relationship with market returns. There is a negative correlation between the NASI and the domestic investment activity in the market. Although the correlation is negative, it is moderate and though the number of domestic investors has risen steadily over the years, the monetary impact at the bourse is still low. Given the importance domestic investors in any local market, there is need to broaden the investor base in the country. Broadening of investor base will increase demand and push the price the prices up and hence lead to higher returns and stock market growth.