Effect of Exchange Rate Volatility on the Ghana Stock Exchange

The study looked at the relationship between Stock Markets and Foreign Exchange market, and determined whether movements in exchange rates have an effect on stock market in Ghana. The Exponential Generalised Autoregressive Conditional Heteroskedascity (EGARCH) model was used in establishing the relationship between exchange rate volatility and stock market volatility. It was found that there is negative relationship between exchange rate volatility and stock market returns - a depreciation in the local currency leads to an increase in stock market returns in the long run. Where as in the short run it reduces stock market returns. Additionally, there is volatility persistence in most of the macroeconomic variables; current period’s rate has an effect on forecast variance of future rate. It was also revealed that an increase (decrease) in trade deficit and expectation in future rise in trade deficit will decrease (increase) stock market volatility. In addition, the consumer price index has a strong relationship with stock market volatility. This means that an increase in consumer price will lead to a rise in stock market volatility. Finally, there is the presence of leverage effect and volatility shocks in stock returns on the Ghana Stock Exchange.

[1]  Walter E. Hoadley.  The Business and Economic Statistics Section , 1951 .

[2]  Georgios Chortareas,et al.  Stock Market Volatility in an Emerging Market: Further Evidence from the Athens Stock Exchange , 2000 .

[3]  A. Christie,et al.  The stochastic behavior of common stock variances: value , 1982 .

[4]  M. Bahmani‐Oskooee,et al.  Stock prices and the effective exchange rate of the dollar , 1992 .

[5]  G. Schwert.  Why Does Stock Market Volatility Change Over Time? , 1988 .

[6]  Constance E. Smith.  Stock markets and the exchange rate: A multi-country approach☆ , 1992 .

[7]  Jeffrey A. Frankel,et al.  Monetary and Portfolio-Balance Models of Exchange Rate Determination , 1987 .

[8]  R. Aggarwal.  EXCHANGE RATES AND STOCK PRICES: A STUDY OF THE US CAPITAL MARKETS UNDER FLOATING EXCHANGE RATES , 2003 .

[9]  Andrew Khoo,et al.  Estimation of foreign exchange exposure: an application to mining companies in Australia , 1994 .

[10]  The stock market and exchange rate dynamics , 1989 .

[11]  G. Schwert,et al.  Stock Returns and Real Activity: a Century of Evidence , 1990 .

[12]  V. Murinde,et al.  Exchange rate and stock price interactions in emerging financial markets: evidence on India, Korea, Pakistan and the Philippines , 1997 .

[13]  Andrew K. Rose,et al.  Empirical research on nominal exchange rates , 1995 .

[14]  Clive W. J. Granger,et al.  A Bivariate Causality between Stock Prices and Exchange Rates: Evidence from Recent Asia Flu , 1998 .

[15]  E. Pentecost,et al.  Common trends and cycles in G-7 countries exchange rates and stock prices , 2000 .

[16]  R. Engle.  Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation , 1982 .

[17]  A. Kanas.  Volatility Spillovers Between Stock Returns and Exchange Rate Changes: International Evidence , 2000 .

[18]  K. French,et al.  Expected stock returns and volatility , 1987 .

[19]  C. K. Ma,et al.  ON EXCHANGE RATE CHANGES AND STOCK PRICE REACTIONS , 2008 .

[20]  Bruno H. Solnik,et al.  Using Financial Prices to Test Exchange Rate Models: A Note , 1987 .

[21]  Kate Phylaktis,et al.  Stock Prices and Exchange Rate Dynamics , 2005 .

[22]  Asani Sarkar,et al.  Crises in Developed and Emerging Stock Markets , 1998 .

[23]  Gordon M. Bodnar,et al.  Firm Valuation, Earnings Expectations, and the Exchange‐Rate Exposure Effect , 1994 .

[24]  T. Bollerslev,et al.  Generalized autoregressive conditional heteroskedasticity , 1986 .

[25]  Campbell R. Harvey,et al.  Inflation and World Equity Selection , 1995 .

[26]  Cheng-Few Lee,et al.  Dynamic relationship between stock prices and exchange rates for G-7 countries , 2001 .

[27]  R. Engle,et al.  The Spline GARCH Model for Unconditional Volatility and its Global Macroeconomic Causes , 2005 .

[28]  R. Donnelly,et al.  The Share Price Reaction of U.K. Exporters to Exchange Rate Movements: An Empirical Study , 1996 .

[29]  L. Glosten,et al.  On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks , 1993 .

[30]  W. Fuller,et al.  Distribution of the Estimators for Autoregressive Time Series with a Unit Root , 1979 .

[31]  Panayiotis Theodossiou,et al.  Stochastic behaviour of the Athens stock exchange , 1993 .

[32]  A. Mishra.  Stock Market and Foreign Exchange Market in India: Are they Related? , 2004 .

[33]  A. Young,et al.  Stock Price Reaction of Multinational Firms to Exchange Realignments , 1972 .

[34]  Michael Naylor,et al.  Some Insights into the Foreign Exchange Pricing Puzzle: Evidence from a Small Open Economy , 2004 .

[35]  V. Bhasin.  Dynamic inter-links among the exchange rate, price level and terms of trade in a managed floating exchange rate system: The case of Ghana , 2004 .

[36]  S. Fischer,et al.  Exchange Rates and the Current Account , 1980 .

[37]  M. Ibrahim.  Cointegration and Granger Causality Tests of Stock Price and Exchange Rate Interactions in Malaysia , 2000 .