IDEAS home Printed from https://ideas.repec.org/a/ris/ilojep/0074.html
   My bibliography  Save this article

Exchange Rate Movement And Stock Returns In Most Capitalised Economies In Sub-Saharan Africa

Author

Listed:

Abstract

In line with the extant literature that financial markets do mutually cooperate, this study investigates the nexus between exchange rate movement and stock returns in the six most capitalised economies in SubSaharan Africa (SSA). The study ascertains the relevance of the traditional or portfolio adjustment theory to sub-Saharan Africa’s financial markets. The study accounted for heterogeneity and dependence among the cross-sections and applied the Driscoll and Kraay and the Feasible Generalised Least Square econometric procedures on Bloomberg (2023) monthly datasets spanning between 2000:1 and 2022:12. The study findings reveal the nexus between the variables flows from stock returns to the exchange rate in SSA and some consistency with the argument of the portfolio adjustment theory. Estimates of DumitrescuHurlin's (2012) Granger non-causal test also reveal a unidirectional causal relationship between both variables in the most capitalised economies in SSA. Macroeconomic policies that vitiate the limitations of both variables in SSA are recommended.

Suggested Citation

  • Ogunsanya, Ibukun & Wasiu Adamson, Temitope, 2024. "Exchange Rate Movement And Stock Returns In Most Capitalised Economies In Sub-Saharan Africa," Ilorin Journal of Economic Policy, Department of Economics, University of Ilorin, vol. 11(1), pages 18-37, June.
    • Handle: RePEc:ris:ilojep:0074
    as

    Download full text from publisher

    File URL: https://ijep.org/issues/volume11issue112024/v1/Ogunsanya2024.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Tian, Maoxi & El Khoury, Rim & Alshater, Muneer M., 2023. "The nonlinear and negative tail dependence and risk spillovers between foreign exchange and stock markets in emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 82(C).
    2. Clement Olalekan Olaniyi, 2022. "On the transmission mechanisms in the finance–growth nexus in Southern African countries: Does institution matter?," Economic Change and Restructuring, Springer, vol. 55(1), pages 153-191, February.
    3. Chkili, Walid & Nguyen, Duc Khuong, 2014. "Exchange rate movements and stock market returns in a regime-switching environment: Evidence for BRICS countries," Research in International Business and Finance, Elsevier, vol. 31(C), pages 46-56.
    4. Hooi Hooi Lean & Paresh Narayan & Russell Smyth, 2011. "Exchange Rate And Stock Price Interaction In Major Asian Markets: Evidence For Individual Countries And Panels Allowing For Structural Breaks," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 56(02), pages 255-277.
    5. Blignaut, James & Mander, Myles & Schulze, Roland & Horan, Mark & Dickens, Chris & Pringle, Catherine & Mavundla, Khulile & Mahlangu, Isaiah & Wilson, Adrian & McKenzie, Margaret & McKean, Steve, 2010. "Restoring and managing natural capital towards fostering economic development: Evidence from the Drakensberg, South Africa," Ecological Economics, Elsevier, vol. 69(6), pages 1313-1323, April.
    6. Wasiu Adamson, Temitope & Adebayo Ajisafe, Rufus & Omobolanle Yussuff, Rukayat, 2022. "Inclusive Growth In Sub-Saharan Africa: Does Sectoral Foreign Aid Matter?," Ilorin Journal of Economic Policy, Department of Economics, University of Ilorin, vol. 9(2), pages 97-128, June.
    7. M. Hashem Pesaran, 2007. "A simple panel unit root test in the presence of cross-section dependence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 265-312.
    8. Joakim Westerlund, 2007. "Testing for Error Correction in Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(6), pages 709-748, December.
    9. Dumitrescu, Elena-Ivona & Hurlin, Christophe, 2012. "Testing for Granger non-causality in heterogeneous panels," Economic Modelling, Elsevier, vol. 29(4), pages 1450-1460.
    10. Syed Ali Raza & Syed Tehseen Jawaid & Sahar Afshan & Mohd Zaini Abd Karim, 2015. "Is stock market sensitive to foreign capital inflows and economic growth?," Journal of Chinese Economic and Foreign Trade Studies, Emerald Group Publishing Limited, vol. 8(3), pages 142-164, October.
    11. Hashem Pesaran, M. & Yamagata, Takashi, 2008. "Testing slope homogeneity in large panels," Journal of Econometrics, Elsevier, vol. 142(1), pages 50-93, January.
    12. Ying Wu, 2000. "Stock prices and exchange rates in VEC model—The case of Singapore in the 1990s," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 24(3), pages 260-274, September.
    13. Ki‐ho Kim, 2003. "Dollar exchange rate and stock price: evidence from multivariate cointegration and error correction model," Review of Financial Economics, John Wiley & Sons, vol. 12(3), pages 301-313.
    14. John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November.
    15. Paul, Satya & Mallik, Girijasankar, 2003. "Macroeconomic Factors and Bank and Finance Stock Prices: The Australian Experience," Economic Analysis and Policy, Elsevier, vol. 33(1), pages 23-30, March.
    16. Peterson Owusu Junior & Anokye M. Adam & George Tweneboah, 2017. "Co-movement of real exchange rates in the West African Monetary Zone," Cogent Economics & Finance, Taylor & Francis Journals, vol. 5(1), pages 1351807-135, January.
    17. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
    18. Syed Ali Raza & Syed Tehseen Jawaid & Sahar Afshan & Mohd Zaini Abd Karim, 2015. "Is stock market sensitive to foreign capital inflows and economic growth?," Journal of Chinese Economic and Foreign Trade Studies, Emerald Group Publishing Limited, vol. 8(3), pages 142-164, October.
    19. Heimonen, Kari & Junttila, Juha & Kärkkäinen, Samu, 2017. "Stock market and exchange rate information in the Taylor rule: Evidence from OECD countries," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 1-18.
    20. Peter Pedroni, 2000. "Fully Modified OLS for Heterogeneous Cointegrated Panels," Department of Economics Working Papers 2000-03, Department of Economics, Williams College.
    21. Hatemi-J, Abdulnasser & Irandoust, Manuchehr, 2002. "On the Causality between Exchange Rates and Stock Prices: A Note," Bulletin of Economic Research, Wiley Blackwell, vol. 54(2), pages 197-203, April.
    22. Lin, Chien-Hsiu, 2012. "The comovement between exchange rates and stock prices in the Asian emerging markets," International Review of Economics & Finance, Elsevier, vol. 22(1), pages 161-172.
    23. Dornbusch, Rudiger & Fischer, Stanley, 1980. "Exchange Rates and the Current Account," American Economic Review, American Economic Association, vol. 70(5), pages 960-971, December.
    24. Xingxing He & Korhan K. Gokmenoglu & Dervis Kirikkaleli & Syed Kumail Abbas Rizvi, 2023. "Co‐movement of foreign exchange rate returns and stock market returns in an emerging market: Evidence from the wavelet coherence approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1994-2005, April.
    25. Granger, Clive W. J. & Huangb, Bwo-Nung & Yang, Chin-Wei, 2000. "A bivariate causality between stock prices and exchange rates: evidence from recent Asianflu," The Quarterly Review of Economics and Finance, Elsevier, vol. 40(3), pages 337-354.
    26. Liang, Chin-Chia & Lin, Jeng-Bau & Hsu, Hao-Cheng, 2013. "Reexamining the relationships between stock prices and exchange rates in ASEAN-5 using panel Granger causality approach," Economic Modelling, Elsevier, vol. 32(C), pages 560-563.
    27. Duc Hong Vo & Thang Cong Nguyen & Ngoc Phu Tran & Anh The Vo, 2019. "What Factors Affect Income Inequality and Economic Growth in Middle-Income Countries?," JRFM, MDPI, vol. 12(1), pages 1-12, March.
    28. Babajide Fowowe, 2015. "The relationship between stock prices and exchange rates in South Africa and Nigeria: structural breaks analysis," International Review of Applied Economics, Taylor & Francis Journals, vol. 29(1), pages 1-14, January.
    29. Samuel Kwaku Agyei & Anokye Mohammed Adam & Ahmed Bossman & Oliver Asiamah & Peterson Owusu Junior & Roberta Asafo-Adjei & Emmanuel Asafo-Adjei, 2022. "Does volatility in cryptocurrencies drive the interconnectedness between the cryptocurrencies market? Insights from wavelets," Cogent Economics & Finance, Taylor & Francis Journals, vol. 10(1), pages 2061682-206, December.
    30. Tsai, I-Chun, 2012. "The relationship between stock price index and exchange rate in Asian markets: A quantile regression approach," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 609-621.
    31. Yau, Hwey-Yun & Nieh, Chien-Chung, 2006. "Interrelationships among stock prices of Taiwan and Japan and NTD/Yen exchange rate," Journal of Asian Economics, Elsevier, vol. 17(3), pages 535-552, June.
    32. Alok Kumar Mishra, 2004. "Stock Market and Foreign Exchange Market in India: Are they Related?," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 5(2), pages 209-232, September.
    33. David McMillan, 2005. "Time variation in the cointegrating relationship between stock prices and economic activity," International Review of Applied Economics, Taylor & Francis Journals, vol. 19(3), pages 359-368.
    34. Athanasios Koulakiotis & Apostolis Kiohos & Vassilios Babalos, 2015. "Exploring the interaction between stock price index and exchange rates: an asymmetric threshold approach," Applied Economics, Taylor & Francis Journals, vol. 47(13), pages 1273-1285, March.
    35. Sikhosana, Ayanda & Aye, Goodness C., 2018. "Asymmetric volatility transmission between the real exchange rate and stock returns in South Africa," Economic Analysis and Policy, Elsevier, vol. 60(C), pages 1-8.
    36. Cumhur Erdem & Cem Kaan Arslan & Meziyet Sema Erdem, 2005. "Effects of macroeconomic variables on Istanbul stock exchange indexes," Applied Financial Economics, Taylor & Francis Journals, vol. 15(14), pages 987-994.
    37. Reboredo, Juan C. & Rivera-Castro, Miguel A. & Ugolini, Andrea, 2016. "Downside and upside risk spillovers between exchange rates and stock prices," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 76-96.
    38. Pan, Ming-Shiun & Fok, Robert Chi-Wing & Liu, Y. Angela, 2007. "Dynamic linkages between exchange rates and stock prices: Evidence from East Asian markets," International Review of Economics & Finance, Elsevier, vol. 16(4), pages 503-520.
    39. Mr. Suman S Basu & Ms. Emine Boz & Ms. Gita Gopinath & Mr. Francisco Roch & Ms. Filiz D Unsal, 2020. "A Conceptual Model for the Integrated Policy Framework," IMF Working Papers 2020/121, International Monetary Fund.
    40. Mourad Mroua & Lotfi Trabelsi, 2020. "Causality and dynamic relationships between exchange rate and stock market indices in BRICS countries," Journal of Economics, Finance and Administrative Science, Emerald Group Publishing Limited, vol. 25(50), pages 395-412, April.
    41. Kim, Ki-ho, 2003. "Dollar exchange rate and stock price: evidence from multivariate cointegration and error correction model," Review of Financial Economics, Elsevier, vol. 12(3), pages 301-313.
    42. Ülkü, Numan & Demirci, Ebru, 2012. "Joint dynamics of foreign exchange and stock markets in emerging Europe," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(1), pages 55-86.
    43. Mohsen Bahmani-Oskooee & Sujata Saha, 2015. "On the relation between stock prices and exchange rates: a review article," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 42(4), pages 707-732, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Xie, Zixiong & Chen, Shyh-Wei & Wu, An-Chi, 2020. "The foreign exchange and stock market nexus: New international evidence," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 240-266.
    2. Tian, Maoxi & El Khoury, Rim & Alshater, Muneer M., 2023. "The nonlinear and negative tail dependence and risk spillovers between foreign exchange and stock markets in emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 82(C).
    3. Andrew Phiri, 2020. "Structural changes in exchange rate-stock returns dynamics in South Africa: examining the role of crisis and new trading platform," Economic Change and Restructuring, Springer, vol. 53(1), pages 171-193, February.
    4. Xingxing He & Korhan K. Gokmenoglu & Dervis Kirikkaleli & Syed Kumail Abbas Rizvi, 2023. "Co‐movement of foreign exchange rate returns and stock market returns in an emerging market: Evidence from the wavelet coherence approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1994-2005, April.
    5. Salah A. Nusair & Jamal A. Al-Khasawneh, 2022. "On the relationship between Asian exchange rates and stock prices: a nonlinear analysis," Economic Change and Restructuring, Springer, vol. 55(1), pages 361-400, February.
    6. Salisu, Afees A. & Ndako, Umar B., 2018. "Modelling stock price–exchange rate nexus in OECD countries: A new perspective," Economic Modelling, Elsevier, vol. 74(C), pages 105-123.
    7. Xiyong Dong & Seong‐Min Yoon, 2018. "Structural breaks, dynamic correlations, and hedge and safe havens for stock and foreign exchange markets in Greater China," The World Economy, Wiley Blackwell, vol. 41(10), pages 2783-2803, October.
    8. Lin, Jeng-Bau & Fu, Shan-Heng, 2016. "Investigating the dynamic relationships between equity markets and currency markets," Journal of Business Research, Elsevier, vol. 69(6), pages 2193-2198.
    9. Wong, Hock Tsen, 2017. "Real exchange rate returns and real stock price returns," International Review of Economics & Finance, Elsevier, vol. 49(C), pages 340-352.
    10. Hock Tsen Wong, 2016. "Real Exchange Rate Returns And Real Stock Price Returns In The Stock Market Of Malaysia," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 64(05), pages 1319-1349, December.
    11. Hong Cheng & Yunqing Wang & Yihong Wang & Tinggan Yang, 2022. "Inferring Causal Interactions in Financial Markets Using Conditional Granger Causality Based on Quantile Regression," Computational Economics, Springer;Society for Computational Economics, vol. 59(2), pages 719-748, February.
    12. Christos Kollias & Stephanos Papadamou & Costas Siriopoulos, 2016. "Stock markets and effective exchange rates in European countries: threshold cointegration findings," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 6(2), pages 215-274, August.
    13. Effiong, Ekpeno L., 2016. "Nonlinear Dependence between Stock Prices and Exchange Rate in Nigeria," MPRA Paper 74336, University Library of Munich, Germany.
    14. Sokhanvar, Amin & Çiftçioğlu, Serhan & Hammoudeh, Shawkat, 2024. "Comparative analysis of the exchange rates-stock returns nexus in commodity-exporters and -importers before and during the war in Ukraine," Research in International Business and Finance, Elsevier, vol. 67(PB).
    15. Afees A. Salisu & Kazeem Isah & Nnenna Ogbonnaya‐Orji, 2022. "A firm level analysis of asymmetric response of U.S. stock returns to exchange rate movements," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1220-1239, January.
    16. Liang, Chin-Chia & Lin, Jeng-Bau & Hsu, Hao-Cheng, 2013. "Reexamining the relationships between stock prices and exchange rates in ASEAN-5 using panel Granger causality approach," Economic Modelling, Elsevier, vol. 32(C), pages 560-563.
    17. Angeliki N. Menegaki, 2019. "The ARDL Method in the Energy-Growth Nexus Field; Best Implementation Strategies," Economies, MDPI, vol. 7(4), pages 1-16, October.
    18. Mohsen Bahmani-Oskooee & Sujata Saha, 2019. "On the effects of policy uncertainty on stock prices," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 43(4), pages 764-778, October.
    19. Dong, Xiyong & Li, Changhong & Yoon, Seong-Min, 2021. "How can investors build a better portfolio in small open economies? Evidence from Asia’s Four Little Dragons," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    20. Gözde YILDIRIM, Zafer ADALI, 2018. "Linear and Non-Linear Causality Tests of Stock Price and Real Exchange Rate Interactions in Turkey," Fiscaoeconomia, Tubitak Ulakbim JournalPark (Dergipark), issue 1.

    More about this item

    Keywords

    Exchange Rate Movement; Stock Returns; Traditional Approach; Portfolio Adjustment Approach; sub-Saharan Africa;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ris:ilojep:0074. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Daniel Akanbi (email available below). General contact details of provider: https://edirc.repec.org/data/deilong.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.