A study of exchange rate volatility, stock and bond returns in developing countries

Ama-Njoku, Chioma
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There has been reports of past movements in stock-bond and stock to exchange rate volatility transmissions. However, studies on volatility transmissions between exchange rate and bonds seem to be non-existent, hence the need to determine the relationship between all these three variables. This study analyzes the link between exchange rate volatility, stock and bond returns in selected countries including Nigeria, Ghana, Kenya, South Africa, and India, using monthly time series data for a period of 5-years (2008-2012). The ARCH (Autoregressive conditional heteroscedasticity) and the more advanced GARCH (Generalized autoregressive heteroscedasticity) models are employed to generate volatilities for exchange rate, stock and bond returns. This is done to take a deeper look at how exchange rates reacted in each country since the year 2007 of the global financial crisis. The test for stationarity, and the order of integration of the data were conducted to get rid of any spurious regression results, using the ADF (Augmented Dickey-fuller method) method. The results showed a negative relationship between exchange rate and stock returns, but exchange rate volatility was insignificant for the stock market in Ghana, Nigeria and India. The relationship between the stock market and exchange rate volatility in Kenya and South Africa was positive. Bond returns were negatively correlated to exchange rate volatility in the Indian, Nigerian, and Kenyan markets, whereas, a positively relationship was found in South African bond market. The study concluded that although exchange rates can explain the cause of movement in stock prices, there are some other variables that cause a movement in stock returns and bond returns other than exchange rates such as inflation and money supply.
A research report submitted to the Faculty of Commerce, Law and Management, University of the Witwatersrand, Johannesburg, in partial fulfilment of the requirements for the degree of Master of Management (Finance and Investment), 2018
Ama-Njoku, Chioma (2018) A study of exchange rate volatility, stock and bond returns in developing countries, , University of the Witwatersrand, Johannesburg, <http://hdl.handle.net/10539/28600>