INVESTIGATING THE RELATIONSHIP BETWEEN STOCK PRICES AND EXCHANGE RATES IN ZAMBIA
DOI:
https://doi.org/10.53555/e.v1i1.1280Keywords:
Exchange rate, stock prices, relationship, volatilityAbstract
Background: Exchange rates are an important element in macroeconomic management and a key determinant factor of
the prices of tradable goods relative to non-tradable goods. It shows the competitiveness of domestic goods relative to
foreign goods. In Zambia since the early 1990s when exchange rates was left to float it has been very volatile due to
external shocks and other factors such as international copper prices. These currency movements make it difficult to
achieve the major goals of the government and companies such as; faster growth rate, economic diversification and
poverty reduction. This volatility has also created uncertainty for the private sector and increased their transaction costs.
It discourages the production of tradables by raising their risk premium compared to non-tradables. The exchange rate
volatility is also transmitted to the stock market which brings about loss of confidence and unpredictability in the
economy. Investors need a predictable environment to secure their investments.. Until the financial system develops
private sector instruments for hedging against exchange rate risk, it is appropriate for the government and Bank of
Zambia to act in the public interest to reduce such risk. In Zambia most research has been concentrated on examining
the relationship of exchange rates and other macroeconomic variables; however, from the literature reviewed we are not
aware of any previous study that examined the relationship between stock prices and exchange rate movements in
Zambia. Therefore, this paper examines how changes in exchange rates affect the stock market and changes in stock
market affect the exchange market.
Materials and Methods The study uses monthly time series data from January 1999 to July 2011. The sample period is
chosen because data for all share indexes is available from 1999. Nominal exchange rate of the Zambian Kwacha to the
US dollar is obtained and stock prices are measured using the LuSE all share index. Nominal exchange rates and all
share stock index data were obtained from the Bank of Zambia (BOZ) and the Lusaka Stock Exchange (LuSE)
respectively.it employs Granger causality test, Johansen Cointegration test and Generalized Autoregressive conditional
Heteroscedasticity (GARCH) tests for volatility.
Results: Johansen cointegration test and the results show that there is no long run relationship between stock prices and
exchange rates in Zambia; that is, the variables do not move together in the long run. Furthermore, Granger causality
test show no causality from stock prices to exchange rates and from exchange rates to stock prices. The EGARCH
estimation results show that volatility in stock market persists and that positive shocks in the stock market generate more
volatility than negative shocks.
Conclusion: Investors on LuSE prefer to hear good news as against bad news.