Stock Market Performance, Interest Rate and Exchange Rate Interactions in Zimbabwe: A Cointegration Approach

Abstract

This research empirically examines the connection between stock market performance, exchange rates and interest rates using the VECM model and monthly time series data. During the pre hyperinflationary phase findings showed that the impact of interest rates on stock market performance were mixed. Stock market performance converged to long run equilibrium with bank rates (1.4%) within 8 months. Unidirectional causality moves from stock market to exchange rates, Treasury bill rates and deposit rates. Bank rates granger causes stock market performance. In hyperinflationary period exchange rate and deposit rates had a positive impact on stock market performance while Treasury bills had a negative effect. In long term the convergence to equilibrium with stock market performance was at rates of 1.3%, 1.5% and 1.8% for exchange rates, Treasury bills and deposit rates respectively. Causality between stock market and exchange rates was bidirectional while unidirectional causality moved from stock market performance to interest rates. Sound exchange rates and treasury bills policies in the long term help stabilize the stock market. Mismanagement of exchange rates and interest rates by monetary authorities will destabilize the stock market. Changes in exchange rates and bank rates are important to investors in the short term.