Effects of Exchange Rate Volatility on the Stock Market: The Zambian Experience

Abstract

This paper examines the effects of exchange rate volatility on the stock market in Zambia. The openness of Zambia’s economy is recognized as a cause of volatility of its market. A closer look at the foreign exchange rate history in Zambia shows considerable level of volatility. No work has been done on the effect of the exchange rate volatility on the stock market, in the Zambian context. Therefore, exploring the effect of Zambia’s foreign exchange rate volatility on its stock market is worthwhile. Time series data was used which span from 2000-2015.  GARCH (1,1) model was used in establishing the relationship between exchange rate volatility and stock market returns. It was found that there is a negative relationship between exchange rate volatility and stock market returns. The research finding is in line with previous studies done. Based on this, it is recommended that the exchange rate movement should be stabilized and be used as a policy tool to attract foreign portfolio investment by relevant policy-makers. Also, there is need for increased use of efficient hedging instruments by firms on the stock market thus  eliminating  negative effects.

Keywords: Volatility, Stock return, Unit root test, GARCH, Zambia.