The impact of the multiple currency system on the performance of the stock market in Zimbabwe
This study investigated the impact of the multiple currency system on the performance of the stock market in Zimbabwe. In particular, the study assessed the major determinants of stock market performance in the multiple currency environment in Zimbabwe, the impact of external factors, as well as the push and pull factors determining foreign investor participation in the Zimbabwean stock market. The study was motivated by the poor performance of the stock market experienced during the multiple currency system, despite some positive developments in the economy such as a positive growth trajectory and low and stable inflation rates of below 5%. The poor performance of the stock market thus underscores the need to understand whether the multiple currency system had an impact on the stock market. While some studies have looked at the impact of macroeconomic factors on stock markets, there is a possibility that due to the uniqueness of the Zimbabwean economy presented by the multiple currency system, existing studies may no longer be relevant in explaining the impact of the macroeconomic factors on stock market performance. Therefore, a gap exists in the economic literature on the potential impact of the multiple currency system in a dollarised economy such as Zimbabwe. The contribution of this study is therefore to assess the determinants of stock market performance under the multiple currency system in Zimbabwe, given its uniqueness. In addition, it adds to the existing empirical financial markets literature on how the multiple currency system influences the transmission mechanism of macro-economic factors on stock market performamce in Zimbabwe. The study applied a panel regression model on all the 54 listed companies operating on the Zimbabwe Stock Exchange, using quarterly data from 2009 to 2016. The study estimated the model using the OLS estimation method. For robustness checks, the study also used the Two Stage Least Squares (TSLS) and the General Methods of Moments (GMM) estimation methods. The results indicated that money supply, domestic interest rates and foreign interest rates were significant factors influencing stock market performance in Zimbabwe under the multiple currency regime. Further, in order to ascertain the validity of the results, a bootstrapping procedure was applied, which confirmed the results obtained in the panel regression model. On the impact of external factors on stock market performance, the stock market index was regressed against the external shocks, namely foreign interest rates, commodity prices, the volatility index which reflected movements in global stock markets, as well as domestic control variables, including domestic economic growth and money supply. The results indicated that only foreign interest rate had a direct influence on stock market performance whilst other external factors were statistically insignificant. It was found, however, that commodity price had an indirect impact on the stock market through its influence on economic activity and its influence on money supply. The results thus show that the multiple currency system influences the stock market through its impact on money supply in the economy. With regard to the push and pull factors influencing foreign investor participation, the value of shares bought by foreigners was regressed against the stock market index, the volume of manufacturing index representing economic conditions in Zimbabwe or pull factors, and foreign interest rates, with the volatility index representing the push factors from the global markets. The results indicated that only the stock market index was important in influencing foreign investor participation, while economic growth and foreign factors such as the volatility index and foreign interest rates were not significant. This could be explained by the low liquidity in the economy, which tends to depress stock prices. Overall, money supply is a major factor that influences stock market performance in Zimbabwe; the multiple currency system affects the liquidity conditions and hence money supply in the economy. The study, therefore, recommends the implementation of policies aimed at easing the liquidity conditions in the economy so as to stimulate economic activity. The study also recommends the removal of restrictions that deter foreign investor participation in Zimbabwe.
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