Effect of Foreign Exchange Exposure on Stock Returns for Non-financial Institutions Listed on the Nairobi Securities Exchange

Abstract

Domestic currency depreciation makes local firms more competitive, leading to an increase in their exports. This in turn raises their stock prices. Forex rate serves as the basic link between the local and the overseas market for various goods, services and financial assets. It provides a basis of matching prices of goods, services, and assets quoted in different currencies. Forex rate movements can affect actual inflation as well as expectations about future price movements. A country‟s external sector of foreign trade is overly affected by foreign exchange rate movements. The study took a correlational approach in seeking to find if indeed foreign exchange exposure is one of the factors that affect the stock market returns and hence the foreign exchange exposure. The population in this study consisted of all 43 non-financial institutions listed on NSE. The study regressed stock returns against exchange rate exposure. The correlation coefficient showed a positive relationship between the study variables. From the ANOVA statistics, the F calculated at 5% level of significance was 5.872 and since F calculated is greater than the F critical (Value = 2.262), this shows that both models were significant. This is a sign that, foreign exchange exposure affects stock returns.