Abstract:
The main objective of every investor is to amass wealth. This objective can be
limited by several risk factors, among which the exchange rate plays a key role
in the investor's decision-making. This has been a source of major concern to
all the stakeholders in the capital market. Thus, the study set out to investigate
the link between the exchange rate and stock returns for seven sectors in
Ghana. The study employed monthly data observations of the seven sectoral
indexes on the Ghana Stock Exchange and the USD-Cedi rate for the period
January 2014 to April 2022 which were obtained from Ghana Stock Exchange
and Bank of Ghana. Analyses of the study were conducted using the bivariate
wavelet coherency and quantile regression as opposed to the traditional
Pearson-correlation and least square as they do not reveal hidden relationships.
The results from the study indicate that there exists a phase-difference comovement
between the exchange rate and stock returns with both assets
driving each other; and that diversification possibilities exist in the short term
rather than in the medium and long term. The quantile regression estimates
also revealed that the exchange rate has a significant and varying positive
effect on the returns of the finance and insurance sectors in normal and bullish
markets. Based on these findings, the study recommends that market
participant should take into account the time-varying nature of the relationship
between the exchange rate and stock returns in their investment decisionmaking.
Also, it is recommended that in times when the market is expanding,
economic policies formulated by policy makers must be geared towards
developing the finance and insurance sectors so as to occasion the growth in
other sectors.
