Stock Price Index and Exchange Rate Nexus in African Markets

ABSTRACT

This paper examines the relationship between stock price index and exchange rate in six African markets using monthly data for the period January 2007 to October 2015. A quantile regression approach is used. This methodology is shown to perform better than the ordinary least squares estimators, particularly when the conditional distribution is heterogeneous. Our empirical evidence reveals an interesting pattern in the association of these two financial markets in Africa, which shows that the negative relationship between stock and foreign exchange markets is more apparent when exchange rates are extremely low or high. The negative relationship between the two variables is in line with the portfolio balance effect.

KEYWORDS:

• Stock market
• foreign exchange market
• exchange rate
• African markets
• quantile regression

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributors

Jimoh Olajide Raji holds BSc (Economics), MSc (Economics) and Ph.D. (Economics) from the University of Ilorin, Nigeria, University of Jos, Nigeria, and Universiti Utara Malaysia, respectively. His key research interests include international finance and open economy macroeconomics.

Yusnidah Ibrahim is a professor of finance in the School of Economics, Finance and Banking (SEFB), Universiti Utara Malaysia (UUM). She obtained her BA and MSc (Actuarial science) from the University of IOWA, US, and Ph.D. from De Montfort University, UK. Her researches are in the area of capital structure, dividend policy, Islamic bonds (Sukuk), small business finance and higher education finance. She is currently the Dean of SEFB, UUM.

Siti-Aznor Ahmad is an associate professor in the School of Economics, Finance and Banking, Universiti Utara Malaysia. She obtained her BSc (Economics) from the Universiti Utara Malaysia, MA (Economics) from the University of Leeds, UK and Ph.D. (Economics) from the University of Glasgow, UK. Her main research interests are in agriculture-related topics, economics of poor and rural area, microfinance, and human resource economics.

Notes

1 Source: http://www.africanbusinesscentral.com/2015/02/19/the-eight-best-performing-african-stock-markets-in-2014-infographic/.

2 Data for NSE All Share Price Index from DATASTREAM do not meet our request, as it starts from 30/9/2010 to date, whereas the starting date of the same data from uk.investing.com satisfies the need of the study. Therefore, to ensure uniformity of data used, we sourced the Namibian All Share Price Index data from: http://uk.investing.com/indices/namibia-all-shares-historical-data.

3 We also test for the quantile slope equality by comparing the coefficients of the return of stock price index for the median with the estimated coefficients of other quantiles. We do not find evidence of deviation of the estimated coefficients from the median quantile for all countries except for Kenya at the lower quantile and Nigeria at the upper quantiles. In particular, our findings (not reported) indicate that the estimated coefficients for Kenya at the 0.2 quantile and for Nigeria at the 0.8 and 0.9 quantiles deviate from the median quantile. The χ²-statistic values are statistically significant at the 1% and 5% levels.