Exchange Rates and Stock Prices in Ghana

Abstract

Using daily data spanning from January 2, 1998 to December 20, 2011, the study investigated the cointegration and the Granger causality relationships between exchange rates and stock prices in Ghana. Augmented Dickey-Fuller test was used to test for unit root process in the data series and the results show that both variables are integrated at order one, I (1). The Engle-Granger (1987) two-step cointegration test was used to test for cointegration between the two variables. The results show that there is no cointegration relationship between the two. Also, a structural break in the relationship between the two variables after the redenomination of the Ghana’s currency (Cedi) on July 3, 2007 was noticed. In effect, VAR between the stock price and exchange rate returns for pre-redenomination and post-redenomination sub-sample periods and consequently test for Granger causality. Unidirectional causality from exchange rates to stock prices before the redenomination but no causality between the two after the redenomination of the cedi.