Foreign portfolio investment, returns, exchange rate and inflation for Zimbabwe: A Granger Causality and EGARCH approach

Autor: Talent Kondo, Simba Mutsvangwa, Felix Chari, Sithokozile Bafana
Jazyk: angličtina
Rok vydání: 2024
Předmět:
Zdroj: Accounting, Vol 10, Iss 4, Pp 193-206 (2024)
Druh dokumentu: article
ISSN: 2369-7393
2369-7407
DOI: 10.5267/j.ac.2024.7.003
Popis: This paper analyses the causal relationship between Foreign Portfolio Investment (FPI), Equities Market Volatility, Exchange Rate and Inflation in Zimbabwe using a monthly time series data between October 2018 and November 2021. The granger causality model was used to present the link between the variables, and EGARCH was used to account for volatility and asymmetric effects on the variables. To incorporate innovations and responses into the Granger model, impulse response functions were used. Links between exchange rate and foreign portfolio investments were found. This only suggests that exchange rate volatility will vary when overseas investors purchase and sell financial securities on the Zimbabwe Stock Exchange (ZSE). In contrast, foreign investors sell local financial securities when local stock market returns are negative, leading to a significant outflow of foreign portfolio investment thereby reducing demand for currency. A significant causal relationship was found between the volatility of the exchange rate and stock market returns. It is assumed that stock market returns, and foreign portfolio investments are caused by fluctuating currency rates. The relationship between exchange rate and ZSE returns, and inflation was found based on Granger causality. This implies that stocks are not suitable for long-term investments that compensate investors for their diminished purchasing power. Policy makers should advise the Zimbabwe Stock Exchange to recommend a reduction in capital gains tax and withholding tax and this encourages investors to hold local equities for a long time.
Databáze: Directory of Open Access Journals
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