ABSTRACT

This study evaluated the influence of traditional cross border investment vehicles on the performance of the Nigerian and Kenyan capital markets, for the period spanning from January 2011 to December 2020. Exchange rate, monetary policy rate (otherwise known as the central bank rate in Kenya), inflation rate, crude oil price and credit rating were used as the traditional cross border investment vehicles. On the other hand, capital market performance was measured by four distinct variables such as the all share index, market capitalization, stock market returns and the derivatives market. The choice of the variables was informed by established economic and finance theories, their use in related studies and the availability of data.  Ex post facto research design was used in a multiple regression analysis framework to determine the partial coefficients of the endogenous variables. First, diagnostic tests involving pretesting of data for unit root based on the Augmented Dickey-Fuller approach was carried out. Thereafter the level and order of integration of the series were determined. The test showed that the series of data were of mixed integration which necessitated the application of the Autoregressive Distributed Lag (ARDL) model. The ARDL bounds test indicated that the influence of traditional cross border investment vehicles on the performance of the Nigerian and Kenyan Capital markets was bound by a long-run relationship. The long-run estimates indicated that the effect of the influence of traditional cross border investment vehicles on the performance of the Nigerian and Kenyan Capital markets varied across the models. Specifically, the long-run estimates showed that the Nigerian capital market was significantly affected by the dynamics of exchange rate and monetary policy more than that of Kenya. On the other hand, the long-run estimates showed that the Kenyan capital market was hit the most by the crude oil price changes and inflation more than Nigeria. In terms of credit rating, the Nigerian capital market was largely negatively affected but that of Kenya seemed less volatile in terms of the effect of credit rating. Regarding the error correction models, it was observed that all the models exhibited an automatic adjustment to equilibrium after very short-run shock. The error correction models also showed that traditional cross border investment vehicles exhibited time-varying effects at different lag lengths.