The effect of foreign direct investment on price volatility of securities in the nairobi securities exchange

Abstract

Foreign direct investment (FDI) is arguably the greatest steady form of global capital movements. Foreign Direct Investment are investments from a mother firm to a place outside the mother firm’s country of origin. FDI comprises of owner’s wealth (equity), firm to firm obligations and retained interest. This analysis of study was conducted with regard to the impact of foreign direct investment and price volatility of securities at the Nairobi Securities Exchange. The research design adopted a causal study design. The population that was targeted for this study was sixty five (65) companies were listed in the NSE as at 31st December 2015. The study used quarterly data on stock market returns, FDI inflows, inflation rate, interest rates, and exchange rate and stock prices for the period January 2006 to December 2015. Data was analyzed using regression model to establish the relationship between FDI inflows, inflation, interest rate, exchange rate and stock price volatility. The study found that price volatility of securities had a positive and insignificant relationship with FDI inflow rate, exchange rates, interest rates but a negative relationship with inflation. The study concluded that an increase in FDI inflow, exchange rate and interest rates leads to an increase in price volatility of securities and that inflation adversely affects price volatilities of securities at the Nairobi Securities Exchange. This study recommended that the government of Kenya should institute policy measures to ensure that they increase foreign direct investment inflows into the country and that Central Bank of Kenya, should come up with guidelines to ensure that the effects of inflation and fluctuations in exchange rates does not affect the price of securities at the Nairobi Securities Exchange