In recent years the performance of most african capital markets has shown a downward trend, zambia included. The lusaka stock exchange stock price index perfomed the worst, dropping 26.83% in local currency by the end of 2016. This study sought to find out the effect of exchange rate on stock market capitalisation.

The time sample that was used in this study was a yearly time series that span from 1994 to 2017, thus representing 23 observations from each ZMW/USD exchange rate and market capitalisation. Multiple regression analysis was perfomed using the Johansen Cointegration test and the Vector Error Correction model (VECM), where market capitalisation was used as the dependenet variable while exchange rate, inflation rate and GDP were used as the independent variables. All the findings were conducted to test whether the test hold at 5% level of significance and these were done using E-views statistical software parkage.

The probability rejection rule of P value < 0.05 indicating relationship between variables, the research results with a probability of 0.0416 and 0.0440 shows that there is a long run relationship between exchange rate and stock market capitalisation, that the coefficient of - 0.109843 indicates that the stock value decreases by 10.98 percent for any one percent depreciation of the kwacha against the dollar. Hence this suggests that the depreciation of the exchange rate negatively affects the perfomance of the lusaka stock market capitalisation. GDP also showed a negative effect of exchange rate on GDP implying that for any one percent depreciation of the currency, GDP decreases by - 54.15879. The results for inflation rate also showed a negative relationship between exchange rate and inflation. Inflation rate of -20.7728 showed a negative effect. if the currency depreciates by any one percent change, inflation changes by -20.7728. Threrefore, this study recommends that the bank of zambia, ministry of finance and mines to adopt policies that can lead to booosting the economy via an increase in productivity so as to ensure an increase in foreign excahnge earnings in the country. These policies may include a predictable and non - descriminatory regulatory environment and an absense of undue administrative impediments to business more generally. Hence ensuring that there is piblic sector transparency, which may include an impartial sysytem of courts and law enforcement penned at redressing the tax system, that could constitute eliminating barrires to attracting more firms to participate in the capital market. Generally, development in the financial inclusion in the financial system will encourage both foreign and domestic capital flows. Therefore, the more foreign currency inflows in the country the better will be the performance of the stock market which will ultimately result in an increase of values of all shares on the stock market.

Keywords: Exchange Rate, Market Capitalisation, Johansen Cointegration, Vector Error Correction Model (VECM)

Obed Shiyunga

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The Effect of Exchange Rate on stock Market Capitalization in the Zambian Capital Market