Exchange rate fluctuations and stock returns in Uganda securities exchange

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Kampala International University, College of Economics and Management.
The purpose of this study was to examine the effect of the exchange rate fluctuations on stock returns in Uganda Securities Exchange (USE). The objectives of this study were to determine the effects of exchange rate fluctuations on stock returns, in both cross-listed companies and local-listed companies in USE, using the Jorion ‘s model and panel data regression. Although empirical and anecdotal evidence suggest two types of results: a group of authors found the effect of exchange rate movements on stock returns; then, another group did not find that effects. The preliminary analysis from the USE monthly returns and nominal exchange rates, for January 1, 2014 to April 30, 2018 period, shows positive skewness, leptokurtosis, and non-normal distribution. The findings of this study revealed a significant effect of exchange rate movements on stock returns in USE. However level and even direction of this effect differ across companies listed on USE. The exchange rate fluctuations had a negative and significant effect on stock returns of the cross-listed companies but there was not a significant effect of that exchange movement on the local-listed companies. All estimations for the whole period and whole companies listed in USE revealed a negative and significant effect between exchange rate and stock returns due to the cross-listed companies with Kenyan stock market. Negative exposure coefficient suggests that if the exchange rate moves by one unit, the stock returns in USE decrease by the amount of the coefficient of exchange rate factor. The highest exchange exposure is observed in case of Cross-listed companies. Basing on these findings, the study concluded that exchange rate fluctuations have a negative and significant effect on the stock returns in USE. The recommendations were formulated regarding these findings such as the Bank of Uganda could define the proactive monetary policy to manage the price dynamics and to reduce the nominal interest rate because in the long run the exchange rate fluctuations cannot be controlled through the USE interventions. The USE’s system could reduce the information asymmetry within the stock market, protect the small-scale investors and increase the number of the companies listed on it in the sense to reduce the negative effect of the exchange rate fluctuations on its stock returns. In all this study has advanced the literature in understanding the mechanisms through which exchange rate fluctuation affects a stock return in Lower developed countries. The Uganda ‘s stock market is vulnerable of the exchange rate fluctuations due to the cross-border companies with USE. The findings of this study joined the group of studies that have found a negative effect of the exchange rate fluctuations on stock returns.
A thesis submitted to the college of economics and management in partial fulfillment of the requirements for the award of the master degree in business administration: finance and banking of Kampala International University
Exchange rate, Fluctuations, Stock returns, Uganda securities exchange