Stock prices and exchange rate dynamics in selected African countries: a bivariate analysis

Purpose The paper aims to investigate the relationship between stock prices and exchange rate movement in seven African countries. Design/methodology/approach It uses vector autoregressive (VAR) cointegration and impulse response analysis to determine the long‐ and short‐run linkages between stock prices and exchange rates. Findings Cointegration analyses indicate a long‐run relationship between stock prices and the exchange rate in Tunisia, where exchange rate depreciation drives down stock prices. A short‐run error‐correction model also shows similar results. Impulse response analyses for other countries show that stock returns in Ghana, Kenya, Mauritius and Nigeria reduce when induced by exchange rate shocks but increase in Egypt and South Africa. Shocks induced by either stock prices or the exchange rate are more protracted in Ghana, Kenya, Mauritius and Nigeria than in South Africa and Egypt. Originality/value This is one of the few studies on Africa which tests for long‐run dynamics and impulse response shock dynamics within a VAR framework. Again unlike other studies it also concentrates on more countries in the sample.