Effect of Exchange Rate Volatility on Stock Prices In Ghana

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Table of Contents

DECLARATION………………………………………………………………………………………… III

Keywords: effects,…………………………………………………………………………………………….. 7

CHAPTER ONE: INTRODUCTION……………………………………………………………………… 8

1.5 Methodology………………………………………………………………………………………………. 13

CHAPTER 2: LITERATURE REVIEW………………………………………………………………… 14

  1. Introduction………………………………………………………………………………………………… 14
    1. Review of Theoretical Literature…………………………………………………………………….. 14
      1. Flow-Oriented Model……………………………………………………………………………………. 15
      1. Stock-Oriented Model…………………………………………………………………………………… 15
    1. Review of Empirical Evidence……………………………………………………………………….. 16
      1. Empirical Evidence on the Relationship Between ‘Exchange Rate and…………………. 16

Stock Price Movement’ for Emerging Economies…………………………………………………… 16

Stock Price Movement’ for Ghana………………………………………………………………………. 17

2.3.3. Conclusions on Empirical Review………………………………………………………………. 19

CHAPTER 3: METHODOLOGY…………………………………………………………………………. 20

  1. Introduction………………………………………………………………………………………………… 20
    1. Research Design………………………………………………………………………………………….. 20
    1. Hypothesis………………………………………………………………………………………………….. 20
    1. Data…………………………………………………………………………………………………………… 21
    1. Population…………………………………………………………………………………………………… 22
    1. Sample……………………………………………………………………………………………………….. 22
    1. Model Specification……………………………………………………………………………………… 23

3.8. Test for Stationarity…………………………………………………………………………………….. 23

CHAPTER FOUR: FINDINGS AND ANALYSIS……………………………………………….. 25

4.1 Introduction…………………………………………………………………………………………….. 25

4.4.1. Granger Causality Test……………………………………………………………………………… 29

4.5. Limitations of Study……………………………………………………………………………………. 30

CHAPTER FIVE: SUMMARY AND CONCLUSIONS………………………………………… 31

APPENDICES………………………………………………………………………………………………….. 35

List of Tables

TABLE 1 SUMMARY OF STATISTICS OF VARIABLES…………………………….. 31

Abstract

The purpose of this study is to identify the whether there exists a Granger-causing relationship between exchange rate and stock prices. Using the Granger-Causality model as a framework, we employed daily data observations of the Ghana Stock Exchange Composite Index (GSE-CI) and the USD-Cedi exchange rate values across the period 2010 -2018.

The data used in the study were obtained from the Bank of Ghana and the Ghana Stock Exchange. Following a Granger-causality test on for causality from exchange rate to stock price change, as well as stock price changes, the results showed that there was neither variable significantly influenced the other. Thus, we concluded that exchange rate changes do not Granger-cause stock price changes or vice-versa. Despite these observations, investors should be aware of other effects of exchange rate in their investment decisions on the stock market.

Keywords: effects, exchange rate, stock price movement

CHAPTER ONE: INTRODUCTION

  •             Background

The influence of exchange rate volatility on economic life has been a topical economic issue in numerous countries that have adopted the flexible exchange rate regime. Gatsi, Appiah, & Wesseh (2016) observe that the adoption of liberalized foreign exchange rate regimes by emerging economies in Asia and Africa has increased the traffic of funds and additionally unleashed its attendant effects on foreign exchange rates. It is widely believed that these effects span various aspects of economic life. In many countries, the stock market remains a critical component of economic life.

Generally, macroeconomic factors including exchange rate, inflation, and interest rate pose systematic risk to investors in a country. Systematic risk refers to the risk that is inherent in an economy and characterizes the market as a whole; hence, it is not peculiar to any one firm. Unlike unsystematic risk, which emanates from firm-specific factors and can be eliminated or reduced through diversification, systematic risk factors always prevail. As such systematic risk factors such as exchange rate must be considered by investors such stock market investors before making investment decisions.

The Ghana Stock Exchange (GSE) serves as the sole platform for stock market activity in Ghana. With about forty-three (43) listed stocks and an average total market capitalization of GHS 65 billion (GSE, 2018) across two listing categories, namely the Official list and the Ghana Alternative Market (GAX), the GSE serves as a reliable source of equity finance for both larger firms and relatively smaller firms operating in Ghana.

As observed by Winful, Sarpong & Kumi (2012), both investors and researchers are getting increasingly interested in the dynamics of stock market returns in emerging economies. This is due to the fast pace of development of the stock markets of emerging economies. Consequently, Ghana’s status as an emerging economy positions studies related to stock prices as critical for policymakers and investors in better understanding the effects that critical risk factors exchange rate may have on it. Ghana’s exposure to the flexible exchange rate regime began in 1983 as part of the Structural Reforms Program initiated under the surveillance of the International Monetary Fund and the World Bank. These reforms included interest rate reforms, removal of credit controls, as well as the adoption of the floating exchange rate regime. Ghana currently practices the managed flexible exchange rate program, where there is some level of intervention by monetary authorities besides market factors of demand and supply determining exchange rates. The floating exchange rate regime enabled free currency trade in Ghana but has had some detrimental consequences on the value of the cedi compared to its main currency trading partners, the US Dollar, Euro, and the Great Britain Pound.

Statistics from the Bank of Ghana show that the cedi has experienced substantial exchange rate depreciation and volatility since the adoption of the flexible exchange rate system. From 2007 to 2018, the cedi has lost over 300% of its value to its major partner trading currency (the dollar), depreciating from the equivalent of a dollar to a cedi, to a dollar to over 4 cedis.