Impact of Exchange Rate Threshold Level on Stock Market Performance-Evidence from Ghana

Abstract

Exchange rate plays a vital role in an economy and the purpose of this study is to investigate the impact of exchange rate threshold level on the capital market performance. The study employed a Threshold Autoregressive model introduced by Tong (1978) and Hansen (1996). The study used secondary quarter-time series data for thirty-years from 1990 to 2019. The capital market performance was measured by the value of shares traded; market turnover; market capitalization and all-shares index. However, the results revealed the following estimated threshold level of exchange rate for each performance indicator: 7.94%; 25.33%; 25.33% and 7.80% respectively. In all, the threshold level of the exchange rate estimated was 8 and 25 per cent. The findings suggest that low exchange rate is performance-enhancing. In addition, the exchange rate above the threshold level is detrimental to the capital market performance. The findings of this investigation might be helpful to the government of Ghana and policymakers as they settle on an exchange rate target to adopt to avoid the detrimental effects of high exchange rate while obtaining the growth benefits of the low exchange rate. It has indicated that the exchange rate impacts the economy more than inflation in the Sub Saharan Africa but, not much works in the subject area in Sub Saharan Africa. Therefore, I recommend that more threshold studies have to be carried out on the exchange rate in the other sectors of the economy to ascertain its impact on the economy.