The Effect of Commodity Prices on Stock Market Performance in Zambia

The recent downward trend of stock markets in Africa has attracted attention from researchers and investors. Among the stock markets that were negatively affected was the Lusaka Securities Exchange (LuSE) in Zambia whose share price index was, down by 26.83%. One of the contributing factors cited was the reduction in commodity prices as the country relies on copper which accounts for more than 70% of its export revenue (www.african-markets.com). Although commodity prices is one of the known factors that contributed to the negative performance, the impact on the stock market is not known. This paper therefore sought to examin the effects of commodity prices (Copper and oil) on the stock market performance and to access if movement in commodity prices can be used by investors on the stock market to forecast expected returns and movements in share prices. The study used Autoregression Distribution Lag, Cointegration analysis and the Vector Error Correction model on stock price index, copper price, and oil price for the period 2004-2016. The results indicated the existence of long- run and short- run relationship between the stock price index, copper and oil prices. Increase in copper price has a positive impact, while increase in oil price has a negative impact on the stock exchange. The findings of the study have implications, firstly policy makers are imformed on the impact of commodity prices on the performance of the Lusaka Securities Exchange. Secondly, investors are also alerted to some extent as they can predict the movement of the stock market returns based on the commodity price movements, hence making sound economic decisions respecting their portfolios. Thirdly, this research has contributed to the empirical evidence on the debate of the association between the commodity prices and stock market performance in developing economies.