Stock Exchange Fungibility and Exchange Rate Volatility in Zimbabwe

Sakarombe, Upenyu and Marimbe-Makoni, Rudo (2020): Stock Exchange Fungibility and Exchange Rate Volatility in Zimbabwe. Published in: Journal of Economics and Political Sciences (JEPS) , Vol. 1, No. 2 (2020): pp. 26-37.

Abstract

Investors, policymakers, and Economists have debated whether high volatility in the parallel exchange rate in Zimbabwe was driven by stock exchange fungibility or not. This study investigated the interaction between the stock exchange fungibility market and the parallel exchange rate market. The study utilised the Granger Causality, Cointegration Test, and the Engle-Granger Error Correction Model to determine the short-run, long-run relationships and speed of adjustment between the variables. Stock exchange fungibility was found to granger-cause exchange rate volatility implying a Portfolio Balance Approach Model. The bearish market activities would chase away investors, so they would sell their shares, convert their monies into foreign currency to turn to the alternative bullish market where shares are fungible. This would lead to the depreciation of the local currency. The results also showed evidence of cointegration with a perfect long-run speed of adjustment towards the equilibrium.

• Item Type: MPRA Paper
• Language: English
• Keywords: stock market, fungibility, exchange rate volatility
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F3 - International Finance; F - International Economics > F3 - International Finance > F31 - Foreign Exchange; F - International Economics > F3 - International Finance > F37 - International Finance Forecasting and Simulation: Models and Applications; F - International Economics > F3 - International Finance > F38 - International Financial Policy: Financial Transactions Tax; Capital Controls; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F42 - International Policy Coordination and Transmission; G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions

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