The relationship between stock market returns and parallel market exchange rates in Zimbabwe: an econometric investigation (2000 to 2007)

Abstract

The study empirically tests the existence and nature of relationship between ZSE returns and three macroeconomic variables, the main one being the parallel market exchange rates. Engle-Grangerís Cointegration analysis and the Error Correction Model (ECM) techniques were employed on monthly time series from 2000 through to 2007. Empirical results point to the existence of a long-term relationship between ZSE returns and parallel market exchange rates, international oil prices and money supply (M2) growth. Money supply growth is observed to exert the highest influence on stock market returns. The parallel market exchange rate, though reported to be insignificant in the short-term, regains its influence in the long run in explaining ZSE returns. However, the importance of international oil prices on ZSE returns is noted to be minimal. Despite some minor influences being observed in the short-term, they vanish away in the long term. These findings seem to point to the fact that ZSE investors or potential investors should pay more attention to the trends of the aforementioned variables for them to be able consistently be at the market. Nonetheless, other factors that are not incorporated in the study should also be considered in making investment decisions, since the aforementioned variables are reported to account for only 53.3 percent of the variations in ZSE returns, signifying the importance of the omitted factors.