Abstract
This study aimed at investigating the link between the Ghanaian exchange rate and stock prices from July 2007 to December 2019, to establish whether appreciation in exchange rate causes stock price increases or otherwise. The Ghana Stock Exchange's (GSE) All-Share Index; served as a proxy for stock prices, while nominal monthly exchange rates for the Ghana Cedi in terms of the US Dollar were utilized as a proxy exchange rate. The Pearson's Product Moment Correlation test was employed to evaluate the link between the two variables, and the Augmented Dickey-Fuller (ADF) test was employed to determine the data's stationarity qualities. The series were all non-stationary since they had unit roots; however, stationarity was attained at the first difference. The results of the regression and correlation analysis conducted revealed that the two macroeconomic variables are negatively connected in the Ghanaian context. In view of the negative association between the exchange rate and stock prices in Ghana, the study advises policymakers to be cautious when implementing exchange rate measures.
Highlights
Instability in the exchange rate has been found to have a pervasive effect on the prices of all commodities and services in the economy, including stock prices
As well as an increase in the exchange rate, would cause stock prices to decline because an increase in interest rates reduces the present value of cash flows (Bunheng et al, 2020)
The findings of this study reveal that the literature and debate around the relationship between stock prices and currency rates are inconclusive
Summary
Instability in the exchange rate has been found to have a pervasive effect on the prices of all commodities and services in the economy, including stock prices. While diversifying and hedging their portfolios, both domestic and international investors profit from understanding the nexus between stock prices and exchange rates (Adeyeye et al, 2017). Cash flow and liquidity in domestic companies improve, causing stock prices to increase. Stock price movements, according to this model, influence aggregate demand via the wealth effect, liquidity effect, and currency rates. As well as an increase in the exchange rate, would cause stock prices to decline because an increase in interest rates reduces the present value of cash flows (Bunheng et al, 2020)
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