The effects of the monetary policy on stock market performance in Zambia: a case study of Lusaka security exchange.

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Kaonga, Dickson
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The University of Zambia
Stock market plays an integral role in economic development in every economy and as such performance of stock markets remains critical in every country. Equity prices are among the key stock market performance indicators that are closely monitored by economic agents and authorities because of their sensitivity to arrival of new macroeconomic information. This sensitivity can cause price volatility and eventually lead to stock market bubbles which can be damaging for the economy. Therefore, the main aim of this study was to empirically investigate the effect of monetary policy shocks on stock market price returns at Lusaka Security Exchange. The study is a quantitative research which employed an ex post facto research design to investigate the subject matter by using predicator variables namely; exchange rate, lending base rate, bank lending rate and money supply (Narrow Money-M1, M2 and M3 is Broad Money) extracted from BoZ statistical reports and stock market indices (LuSE Statistical Reports) as criterion variables from 2014-2018, using monthly data. Pearson correlation as well as Multi-linear regression model was employed in this study using SPSS version 23 analysis software. Furthermore, Kolmogorov-Smirnov, Shapiro-Wilk was employed to test normality of the data and also descriptive analysis (using mean and standard deviation) to understand the characteristic of the data. The results showed that money supply has a positive effect on stock market price returns and the effect is statistically significant with P-value less than .05 ( M1, P=.028,M2,P=.002 and M3, P=.001) . On the other hand variations in Interest rate induced by Monetary Policy has a statistically significant inverse effect on stock market indices with p value less than .05 (Lending base rate, P=.002 and Bank lending rate, P=.001). Similarly, exchange rate exhibits an inverse effect on stock market price returns (P=.001) Therefore, the study concludes that independent variables as captioned above significantly affect stock market performance in Zambia and account for 82% (R Square =0.82) of the changes in stock market indices. It is therefore recommended that Monetary Authority should demonstrate innovations through adjustment of monetary policy instruments to enhance stock market performance be way of attaining stability in stock prices and in exchange rate thereby enhance predictability in the market by economic market agents (Investors) when making investment decisions and also at macro level enable stock market performance to permeate the real sector.
Thesis of Business Administration in Finance.