Examining the asymmetric relationship between foreign derivative investment and financial growth of Nairobi Stock Exchange [NSE]-listed firms: A Nonlinear Autoregressive Distributed Lag [NARDL] approach

Abstract

This study examines whether the relationship between foreign derivative investment (FDerI) and financial growth of firms listed on the Nairobi Securities Exchange (NSE) is asymmetric — that is, whether positive shocks (increases) and negative shocks (decreases) in FDerI exert differential and non-linear effects on net profit growth. Conventional symmetric models mask this heterogeneity; the Nonlinear Autoregressive Distributed Lag (NARDL) framework is uniquely suited to detect it. Using an unbalanced panel of 40 NSE-listed firms over 2019–2024 (N = 240 firm-year observations), the study decomposes FDerI into its positive partial sums (FDerI+) and negative partial sums (FDerI−), constructs the NARDL model alongside control variables (firm leverage, liquidity, and size), and applies panel-NARDL bounds testing, Wald asymmetry tests, and cumulative dynamic multiplier analysis. Prior to estimation, data undergo pooled winsorisation, Levin-Lin-Chu unit root tests confirming stationarity, and Driscoll-Kraay standard error correction for cross-sectional dependence and serial correlation. The bounds test confirms a long-run cointegrating relationship between FDerI and financial growth. A significant asymmetry is detected: positive FDerI shocks have a statistically negligible effect on financial growth (β+ ≈ 0.012, p > 0.05), while negative shocks derivative withdrawals or contractions  exert a significant negative impact (β− = −0.187, p < 0.01). The Wald test rejects symmetry (F = 8.43, p < 0.01). Dynamic multipliers reveal an asymmetric adjustment path: negative shocks propagate to financial growth more rapidly and persistently than positive shocks, with full adjustment achieved after approximately four quarters. The short-run error correction term is negative and significant (ECT = −0.312, p < 0.01), confirming reversion to long-run equilibrium. The dominant negative-shock channel suggests that derivative market contractions driven by regulation tightening, liquidity dry-up, or global risk-off episodes  damage NSE firm growth more severely than derivative expansions benefit it. The CMA should prioritise market depth, liquidity buffers, and hedging cost reduction to prevent adverse derivative shocks. This is the first study to apply a panel-NARDL approach to the FDerI–financial growth nexus in a frontier African derivatives market, addressing the long-standing gap in symmetric modelling. The study introduces the concept of the "asymmetric hedging trap" where NSE-listed firms suffer disproportionately from derivative downturns relative to any gains from expansions. The study recommends that regulatory and corporate risk-management attention be redirected from encouraging derivative market expansion toward safeguarding firms against derivative contractions.