Short-run and Long-run Dynamics of Stock Prices and Exchange Rates in Developing Economies: Evidence from Malawi.

Abstract

The study investigates the short-run and long-run dynamic relationship between stock prices and exchange rate in Malawi from January 1999 to January 2010. The study also considers the effect of internal and external macroeconomic structural shocks on the stock and foreign exchange markets. The data series consisted of the MSE stock price index, the nominal exchange rate, interest rate and JSE stock price index. The analysis used Johansen procedure for testing possibility of cointegration among the time series data. The results reveal no evidence of long-run relationship between the variables. We then employed standard Granger causality approach for testing the direction of causality. The Granger causality results show that stock prices and exchange rates do not cause each other during the period of the analysis. Our results further indicate that internal and external macroeconomic shocks do not have immediate influence on the stock and foreign exchange markets.

Keywords: Stock prices, Exchange rates, Granger causality, Cointegration test, Malawi