Macro-Economic Variables Determining Stochastic Volatility of The Zambian Currency

George M. Mukupa, Noah Kachingwe ,Douglas Kunda

In this paper, we assess the macro-economic determinants of the stochastic volatility of the Zambian currency over time. The research was motivated by the debates revolving around the depreciation of the Zambian currency against major foreign currencies, which are mainly characterized by a lack of empirical analysis and evidence of the factors influencing the volatility of the currency. We determine the correlation between the Zambian foreign currency exchange rate and the macro-economic variables including inflation, interest rate, foreign direct investment and external debt; and forecast the volatility of the Zambian currency based on the historical data. Our results show a statistically significant relationship between the exchange rate of the Zambian currency and the macro-economic indicators at a 95 percent level of confidence. In this respect, the Zambian foreign currency exchange rate is found to be highly sensitive to external debt and foreign direct investment net inflows.