Effect Of Exchange Rate On The Stock Returns Of Manufacturing Firms In Ghana

Abstract

The study examined the effect of exchange rate on the stock returns of manufacturing firms in Ghana. The study aimed to investigate the potential asymmetric impact of exchange rate on the stock returns of manufacturing firms, as well as evaluate the degree of comovement between these two variables. Data from monthly stock returns spanning from January 2008 to December 2020 were collected from the Ghana Stock Exchange (GSE) website. Data on exchange rates (EXR) were also sourced from the website of the Bank of Ghana. A quantitative research method was employed, with the research design being explanatory. The data collected were analyzed using the quantile regression model to analyze the asymmetric effect between the variables in the study. The bi-wavelet technique was also employed to determine the comovement of the variables. Based on the findings, the first objective in general suggests a significant asymmetric effect of exchange rate on the stock returns of the manufacturing firms given different market conditions. In the bearish market condition, exchange rate affected the returns of Benso Oil Palm Plantation (BOPP), Camelot Ghana Limited (CMLT), and Unilever Ghana Limited (UNIL). This was seen also in the normal market where the effect of exchange rate was effectively asymmetric with the returns of BOPP, CMLT, Fan Milk Ghana Limited (FML), and UNIL. The bullish market observed an asymmetric effect on all seven manufacturing firms. The findings from the second objective also show a weak comovement between the two variables in the frequency-time domain, especially in the long term. However, a strong comovement existed in the short and medium terms. The study recommended that investors should pay more attention to changes in exchange rates and channel their investments to firms that yield higher returns when these changes occur. Further, the Bank of Ghana management body, who are responsible for managing the exchange rate ought to introduce exchange rate management strategies that are favorable to improving the stock returns of the manufacturing firms since the study provides evidence to show that the changes in exchange rate led to changes in the stock returns of these manufacturing firms.