Abstract of attention of Egyptian monetary policy due to



The economy of a nation
is driven by a robust securities market. The growth of a nation is indubitably
based on the strength and stability of its secondary market systems and
intermediaries. The mobilization of funds and its flow into diverse sectors of the
economy in a regulated manner signifies dynamism and progress. Egypt as an
economy has been in a trajectory of progress right since the establishment of
its Secondary Market and its Index EGX 30 in 2009. The Egyptian Pound (EGP) has
been at the centre of attention of Egyptian monetary policy due to undue stress
on it for quite some time. The Central Bank of Egypt (CBE) has been in the
forefront to stabilize the Pound from time to time.

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The changing economic
environment of a country has an indelible impact on its growth and development.
Any change in the foreign exchange market is sure to leave its footprint in the
secondary market. An intrigue that is plaguing all researchers in the field of
Foreign Exchange Management, is the query about the relationship between
Secondary Market and Forex Market. Many an investigation has been done to see
if there is a significant relation between Stock Prices and Exchange Rates. The
recent transition in Egyptian Economy to float its currency and its efforts to
stabilize the Pound has attracted researchers to find out the effects of such a
move. The relationship between securities market and forex market has to be
given a serious thought before any decision in the forex market policy and
regulation. Hence this study analyses the dynamic relationship between stock
market and exchange rate in Egypt using Engle-Granger cointegration method.


Keywords: Changing
Economic Environment; Egyptian Economy; Exchange Rate; Stock Prices;
Cointegration; Granger Causality; Econometrics




Egyptian Economy stands
tall in the African Continent. However the Exchange rate instability in the
last year is a matter of Economic concern. The economy went in through a
dynamic change in its policies and processes. There were sudden strategies and
decisions by the government that took the Egyptians through a vortex of change.

The role of Capital
Market in the development of a nation cannot undermined. Exchange rate
movements have a significant role in determining the direction of growth of any
country. These two important economic variables have been at the forefront of
economic observation by researchers in all countries. This dynamic relationship
has been utilized by policy makers, due to their predictive efficacy.

The recent Exchange
Rate crisis in a few nations, have reiterated that the relationship between
stock prices and exchange rates is a matter of contention even today. Empirical
investigation into their relationship might lead to meaningful discoveries.
This paper seeks to study the dynamic relationship between stock prices and
exchange rate in Egypt. The context of the study is the instability of the Egyptian
Pound (EGP). Egyptian Stock Index (EGX) has seen its own share of ups and
downs. Firstly unit root tests were employed to test stationarity of the given
series. Secondly Cointegration was tested using and Engle – Granger’s (1987)
two – step methodology. A long-run relationship between stock market and forex
market in Egypt was observed in this study. A unidirectional causality from
forex market to stock market was also witnessed.

2.      Literature Review

Academic research has
been intrigued by the relation between exchange rates and stock prices. This
interest spiked ever since nations have moved towards flexible exchange rate
system. The researches have evolved around two theoretical models:
flow-oriented and stock-oriented. The flow oriented models, reiterate that the
stock prices and exchange rates are positively related since, exchange rate is
determined by a country’s current account and trade balance (Dornbush and
Fisher, 1980). While the stock-oriented models, hold that the stock prices push
up interest rates and subsequently have a downward pressure on exchange rate
since, capital account determines exchange rates (Branson, 1983, Gavin, 1989).

Few researches have
indicated a relation between exchange rates and stock prices. Bahmani – Oskooe &
Sohrabian (1992) found a bi-directional causality, even though there was no
long-run relation using Granger Concept of Causality, Akaike’s final prediction
error conjecture and Chow Test. Granger and others (2000) applied unit root and
cointegration models to determine the appropriate Granger causality relation
between stock prices and exchange rates during Asian crisis. The authors found
positive correlations between exchange rates and stock prices from the data of
Japan and Thailand. Whereas the data of Taiwan indicated negative correlation.
Ramaswamy and Yeung (2005) considered the causality between stock markets and
exchange rates in nine east Asian economies and found that the direction of
causality demonstrated a hit-and-run behaviour and switched according to the
length of the period. Alagidede and others (2010) conducted three variations of
Granger causality test and found out causality from exchange rates to stock
prices for Canada, Switzerland and UK. A weak causality in the other direction
was found only for Switzerland. Causality was observed from stock prices to
exchange rates in Japan. Nieh and Lee (2001) found lack of long-run
relationship between the stock prices and exchange rates.

There is not much
empirical observation of the changing dynamics of the financial markets in
Egypt. Thus this study explores the dynamic relationship between stock prices
and exchange rate in Eygpt.

3.      Data and Methods

Stock prices data
comprise of EGX 30 and Exchange rate data comprises of USD/EGP. The data have
been collected from www.investing.com. The period of data collection is from
2009 January to 2017 December. The year 2009 was chosen since EGX 30 was
started that year. All analysis was carried out
using GRETL software.

3.1. Unit Root Test

The Unit Root Test of
Dickey and Fuller (1981) has been employed. It is used to ensure that the data
of a time series variable is non-stationary using an auto-regressive model.
This test has been deployed to ensure that data is stationary and ensuring that
all variables are I (1) as variables that are I (0) indicate an automatic
long-run equilibrium correlation.

The Augmented Dickey
Fuller (ADF) Unit Root Test consists of estimating the following regression:

= ?1 + ?2t + ? Yt-1 + ?i  t-1 +

The null of non-stationarity hypothesis is stated

H0: A unit
root ‘or’ non-stationarity ‘or’ ? = 0

H1: No unit
root ‘or’ stationarity ‘or’ ?


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