MACROECONOMIC VARIABLES AND STOCK MARKET RETURNS IN GHANA: ANY CAUSAL LINK?

The purpose of the study is to examine the existence of causality between macroeconomic variables and stock returns in Ghana. The study employs monthly time series data spanning the period January 1995 to December 2010. Unit root test is performed using ADF, PP and KPSS tests. Then, Vector Error Correction (VECM) model is used to establish long-run and short-run relationship between stock performance and macroeconomic variables. In order to determine the existence or otherwise of causality, the Granger Causality tests is performed. Impulse response functions and forecast error variance decomposition are used to assess the stability of the relationship between stock returns and macroeconomic variables over time. The study reveals that a significant long run relationship exists between stock returns and inflation, money supply and Foreign Direct Investment (FDI). In the short-run, a significant relationship exists between stock returns and macroeconomic variables such as interest rate, inflation and money supply. In the short-run the relationship between stock returns and FDI is only imaginary. Our VECM coefficient shows that it takes approximately 20 months for the stock market to fully adjust to equilibrium position in case a macroeconomic shock occurs. Lastly, a causal relationship running from inflation and exchange rate to stock returns has been established. Then also, a causal relationship running from stock returns to money supply, interest rate and FDI has also been revealed. The findings imply that arbitrage profit opportunities exist in the Ghana stock market contrary to the dictates of the Efficient Market Hypothesis (EMH). In terms of original value,among the studies done on the topic in Ghana so far, this is the only study that incorporates dividend in the computation of returns on the Ghana Stock Exchange.

[1]  J. Kuwornu.  Effect of Macroeconomic Variables on the Ghanaian Stock Market Returns: A Co-integration Analysis , 2012 .

[2]  W. Fuller,et al.  Distribution of the Estimators for Autoregressive Time Series with a Unit Root , 1979 .

[3]  S. Johansen.  Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models , 1991 .

[4]  K. A. Osei.  Macroeconomic Factors and the Ghana Stock Market , 2006 .

[5]  A. Kyereboah-Coleman,et al.  Impact of macroeconomic indicators on stock market performance: The case of the Ghana Stock Exchange , 2008 .

[6]  P. Phillips,et al.  Testing the null hypothesis of stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root? , 1992 .

[7]  S. Johansen,et al.  MAXIMUM LIKELIHOOD ESTIMATION AND INFERENCE ON COINTEGRATION — WITH APPLICATIONS TO THE DEMAND FOR MONEY , 2009 .

[8]  M. Kazi.  Stock Market Price Movements and Macroeconomic Variables , 2008 .

[9]  T. Mukherjee,et al.  DYNAMIC RELATIONS BETWEEN MACROECONOMIC VARIABLES AND THE JAPANESE STOCK MARKET: AN APPLICATION OF A VECTOR ERROR CORRECTION MODEL , 1995 .

[10]  J. Kuwornu,et al.  Analyzing the effect of macroeconomic variables on stock market returns: Evidence from Ghana , 2011 .

[11]  Taufiq Choudhry.  Inflation and rates of return on stocks: evidence from high inflation countries , 2001 .

[12]  J. G. Hülsmann.  A theory of interest , 2002 .

[13]  M. Majid,et al.  Macroeconomic Variables and Stock Returns in the Post 1997 Financial Crisis : An Application of the ARDL Model , 2022 .

[14]  S. Ross,et al.  Economic Forces and the Stock Market , 1986 .

[15]  C. Granger.  Investigating Causal Relations by Econometric Models and Cross-Spectral Methods , 1969 .

[16]  Chris Brooks,et al.  Introductory Econometrics for Finance , 2002 .

[17]  Erik Hjalmarsson,et al.  Testing for Cointegration Using the Johansen Methodology When Variables are Near-Integrated , 2007, SSRN Electronic Journal.

[18]  E. Fama.  Stock Returns, Real Activity, Inflation, and Money , 1981 .

[19]  Søren Johansen,et al.  Modelling of cointegration in the vector autoregressive model , 2000 .

[20]  J. Kuwornu,et al.  Macroeconomic Variables and Stock Market Returns: Full Information Maximum Likelihood Estimation , 2011 .

[21]  K. A. Osei.  Analysis of factors affecting the development of an emerging capital market: the case of the Ghana stock market , 1998 .

[22]  George Tweneboah,et al.  Macroeconomic Factors and Stock Market Movement: Evidence from Ghana , 2008 .

[23]  S. Johansen.  STATISTICAL ANALYSIS OF COINTEGRATION VECTORS , 1988 .

[24]  Return-Volatility Interactions in the Nigerian Stock Market , 2012 .

[25]  The Effect of Macroeconomic Variables on Stock Prices in Emerging Stock Market : Empirical Evidence From India , 2014 .

[26]  P. Phillips.  Testing for a Unit Root in Time Series Regression , 1988 .

[27]  J. Pointon,et al.  Does the inflation rate affect the performance of the stock market? The case of Egypt , 2001, Emerging Markets Review.

[28]  K. Hadri.  Testing The Null Hypothesis Of Stationarity Against The Alternative Of A Unit Root In Panel Data With Serially Correlated Errors , 1999 .

[29]  D. Hendry,et al.  Co-Integration and Error Correction : Representation , Estimation , and Testing , 2007 .

[30]  Sadia Saeed,et al.  Impact of Macroeconomic Factors on Banking Index in Pakistan , 2012 .

[31]  S. Frimpong.  Speed of Adjustment of Stock Prices to Macroeconomic Information: Evidence from Ghanaian Stock Exchange (GSE) , 2011 .

[32]  C. Granger,et al.  Co-integration and error correction: representation, estimation and testing , 1987 .

[33]  C. McGowan,et al.  STOCK PRICE AND EXCHANGE RATE CAUSALITY : THE CASE OF FOUR ASEAN COUNTRIES , 2007 .