Effects of interest and exchange rate volatility on stock returns: Evidence from the financial sector of Tanzania

Abstract

This study analyzes the impact of interest and exchange rate volatility on financial sector stock returns in Tanzania. The study adopted secondary time-series data from 2014 to 2021. In data analysis, the study also utilized the Autoregressive Distributed Lag (ARDL)bound test approach to establish the long and short-term effects of the independent variable of interest on stock returns. Results showed a long-term inverse relationship between interest rates and financial sector stock returns. However, during the specific period from June 2014 to April 2021, interest rates were insignificant in affecting stock returns despite the inverse trend. In contrast, exchange rates significantly affected stock return fluctuations, showing a short-term inverse relationship. The study recommends that the government undertake actions to stabilize exchange rate increases and control interest rate volatility to boost investors’ confidence, given their significant influence on stock market volatility.