Exchange Rate and Stock Returns: Evidence from the Ghana Stock Exchange

Abstract

The main objective of every investor is to amass wealth. This objective can be limited by several risk factors, among which the exchange rate plays a key role in the investor's decision-making. This has been a source of major concern to all the stakeholders in the capital market. Thus, the study set out to investigate the link between the exchange rate and stock returns for seven sectors in Ghana. The study employed monthly data observations of the seven sectoral indexes on the Ghana Stock Exchange and the USD-Cedi rate for the period January 2014 to April 2022 which were obtained from Ghana Stock Exchange and Bank of Ghana. Analyses of the study were conducted using the bivariate wavelet coherency and quantile regression as opposed to the traditional Pearson-correlation and least square as they do not reveal hidden relationships. The results from the study indicate that there exists a phase-difference comovement between the exchange rate and stock returns with both assets driving each other; and that diversification possibilities exist in the short term rather than in the medium and long term. The quantile regression estimates also revealed that the exchange rate has a significant and varying positive effect on the returns of the finance and insurance sectors in normal and bullish markets. Based on these findings, the study recommends that market participant should take into account the time-varying nature of the relationship between the exchange rate and stock returns in their investment decisionmaking. Also, it is recommended that in times when the market is expanding, economic policies formulated by policy makers must be geared towards developing the finance and insurance sectors so as to occasion the growth in other sectors.