FOREIGN EXCHANGE RATE AND SECTORAL RETURN VOLATILITY AT THE NAIROBI SECURITIES EXCHANGE, KENYA
FOREIGN EXCHANGE RATE AND SECTORAL RETURN VOLATILITY AT THE NAIROBI SECURITIES EXCHANGE, KENYA
James Baariu Mungiria - Postgraduate Student, Department of Accounting & Finance, School of Business, Economics and Tourism, Kenyatta University, Kenya
Dr. Charity Njoka - Lecturer, Department of Accounting & Finance, School of Business, Economics and Tourism, Kenyatta University, Kenya
Dr. Vincent Mutswenje - Lecturer, Department of Accounting & Finance, School of Business, Economics and Tourism, Kenyatta University, Kenya
ABSTRACT
The securities market plays a central role in investment intermediation and risk allocation; however, in emerging economies, this role is constrained by elevated return volatility. At the Nairobi Securities Exchange, heightened volatility was associated with an estimated reduction of KES 1.548 trillion in market capitalisation between April 2018 and December 2023, with the Telecommunications and Technological, Banking, and Manufacturing sectors accounting for over 85 per cent of total trading activity. Although prior studies associate this volatility with macroeconomic fluctuations and oil price shocks, empirical analysis in Kenya has relied mainly on aggregate market indices. This aggregation masks sector-specific risk dynamics and limits the identification of heterogeneous sector vulnerabilities, thereby weakening policy and investment analysis. The absence of a sector-level framework integrating macroeconomic fundamentals has reduced the explanatory depth of existing evidence. This study examined the effects foreign exchange rate on sectoral return volatility at the NSE. Guided by a positivist philosophy and causal research design, the study applied quota sampling across 10 sectors and 47 listed firms using monthly data from 2011 to 2024. The study was grounded on Flow Oriented Exchange Rate model. The findings demonstrate that the foreign exchange rate significantly affect six sectors. They further support sectoral volatility monitoring and sector-specific index development to strengthen risk assessment and market surveillance. The study recommends institutionalised sectoral volatility monitoring. Future research should analyse sectoral return volatility using firm size classifications, asymmetric and regime-switching GARCH models, and unbalanced panel techniques.
