Dynamic Linkage between Foreign Equity Flows and Stock Market Returns at the Nairobi Securities Exchange
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Date
2018-07-15
Authors
Gachanja, S. N
Kosimbei, G
Journal Title
Journal ISSN
Volume Title
Publisher
Strategic Journals
Abstract
This study investigated the dynamic linkage between foreign equity flows and equity returns at the Nairobi
Securities Exchange (NSE) since foreign equity flows are expected to induce a surge in domestic stock prices
and consequently a fall in price when foreign equity investors exit the domestic stock market. An increase in
the stock prices attracts foreign investors in to the domestic stock market. The main objective of this study
was to understand how stock prices in Kenya influence foreign equity flows, and in turn how foreign equity
flows affect stock prices. To understand the dynamic linkages between foreign equity flows and stock market
returns the study utilized vector autoregressive models, causality tests, vector decomposition and impulse
response functions together with data from the Capital Markets Quarterly statistical bulletins for during and
after 2007/2008 financial crisis (January 2007 to December 2015). Monetary variables used included NSE 20
share index which represents stock market returns, net foreign equity flows, foreign equity outflows and
inflows. The study established that foreign equity flows has a positive and significant effect on stock markets
returns. Also, foreign equity flows granger causes stock market returns at Nairobi Securities Exchange which
is consistent with price pressure hypothesis. Hence, there is need for the government agencies to implement
relevant policies that can attract equity inflows in Kenya.
Description
A Research Article in The Strategic Journal of Business & Change Management
Keywords
Foreign Equity Flows, Stock Market Returns
Citation
Gachanja, S., & Kosimbei, G. (2018). Dynamic Linkage Between Foreign Equity Flows And Stock Market Returns At Nairobi Securities Exchange. Strategic Journal of Business Change Management, 5(3).