Interest Rate and Exchange Rate Exposure of Portfolio Stock Returns: Does the Financial Crisis Matter?

The study examines the impact of changes in interest rate and exchange rates and their unexpected changes on industry and size portfolio returns on the Ghana Stock Exchange (GSE) controlling for the 2007/2008 financial crisis. Three main exchange rates (FX) namely, Ghana cedis (Gh¢)/US dollar, Gh¢/Great Britain Pounds (GBP) and the Gh¢/Euro are used. We use OLS, GARCH and ARIMA in our estimations. The study found that only depreciation of the Gh¢/USD reduces the returns of financial stocks and large firms. There is a direct positive impact of the financial crisis on the returns due to investment shift from developed markets where crisis occurs. Variations in the returns are mostly explained by the market index returns (RM), which has a positive impact. However, we find that the positive impact of RM on the portfolio returns (finance, medium and large portfolios) is reduced during the financial crisis. The results largely reveal that shocks to the conditional variance are highly persistent and the response of volatility decays at a slower rate.