Abstract
This study seeks to provide new evidence on the stock market and exchange rate relationship in Zimbabwe, a country that does not have its own sovereign currency. The bivariate vector autoregressive approach is used to establish the relationship between the stock market and exchange rates. The results show that no relationship exists between the stock market and the proxy exchange rate. The findings contradict the expectation that exchange rate movements would influence domestic stock market prices. This finding is especially interesting given the fact that Zimbabwe uses a basket of currencies for transacting purposes, albeit with the United States dollar as a major currency for reporting and stock market pricing purposes. The findings provide new evidence of a disconnect between the stock market and exchange rate movements. This has implications for international portfolio diversification and the use of foreign currency as an asset class in an economy using a multiple currency system.
Highlights
The impact or reverse thereof of stock markets on exchange rates has received considerable attention in the literature over the past couple of decades
This study provides new evidence on the exchange rates–stock market return with its primary focus on a country without a sovereign currency
The literature shows that some economies experience bidirectional causality between stock market returns and exchange rates
Summary
The impact or reverse thereof of stock markets on exchange rates has received considerable attention in the literature over the past couple of decades. This study takes a different angle in that the relationship is tested based on a proxy exchange rate due to the multiple currency regime system adopted by Zimbabwe in 2009. Since the adoption of the multiple currency system coupled with reduced company productivity, Zimbabwe has relied on South Africa for imports (Nakunyada & Chikoko, 2013; Pindiriri, 2012). The US dollar/rand exchange rate is the main currency exposure facing Zimbabwean investors, firms and investors seeking international portfolio diversification. This study seeks to establish the relationship between the ZSE industrial index and the US dollar/rand exchange rate for a period spanning February 2009 to May 2015. It is important to note that the ZSE halted trading at the peak of the hyperinflation period from August 2008 to January 2009 as the Zimbabwean dollar depreciated tremendously in line with the astronomically high inflation levels
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