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Macroeconomic Variables and Stock Market Returns in Ghana: Any Causal Link?

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  • Haruna Issahaku

    ()
    (Department of Economics and Entrepreneurship Development, Faculty of Integrated Development Studies, University for Development Studies, Tamale, Ghana.)

  • Yazidu Uztarz

    (Department of Economics and Entrepreneurship Development, Faculty of Integrated Development Studies, University for Development Studies, Tamale, Ghana.)

  • Paul Bata Domanban

    (Department of Economics and Entrepreneurship Development, Faculty of Integrated Development Studies, University for Development Studies, Tamale, Ghana.)

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    Abstract

    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.

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    Bibliographic Info

    Article provided by Asian Economic and Social Society in its journal Asian Economic and Financial Review.

    Volume (Year): 3 (2013)
    Issue (Month): 8 (August)
    Pages: 1044-1062

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    Handle: RePEc:asi:aeafrj:2013:p:1044-1062

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    Related research

    Keywords: Ghana stock exchange; Macroeconomic variables; Granger causality test; Vector error correction; Ghana; Stock returns; Time series analysis;

    References

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    1. Mukherjee, Tarun K & Naka, Atsuyuki, 1995. "Dynamic Relations between Macroeconomic Variables and the Japanese Stock Market: An Application of a Vector Error Correction Model," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 18(2), pages 223-37, Summer.
    2. Margaret N. Okoli, 2012. "Return-Volatility Interactions in the Nigerian Stock Market," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 2(2), pages 389-399, June.
    3. Adam, Anokye M. & Tweneboah, George, 2008. "Macroeconomic Factors and Stock Market Movement: Evidence from Ghana," MPRA Paper 11256, University Library of Munich, Germany.
    4. Pär Österholm & Erik Hjalmarsson, 2007. "Testing for Cointegration Using the Johansen Methodology When Variables Are Near-Integrated," IMF Working Papers 07/141, International Monetary Fund.
    5. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
    6. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    7. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    8. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
    9. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
    10. Johansen, Soren, 2000. "Modelling of cointegration in the vector autoregressive model," Economic Modelling, Elsevier, vol. 17(3), pages 359-373, August.
    11. Kofi A. Osei, 2006. "Macroeconomic Factors and the Ghana Stock Market," The African Finance Journal, Africagrowth Institute, vol. 8(1), pages 26-38.
    12. Choudhry, Taufiq, 2001. "Inflation and rates of return on stocks: evidence from high inflation countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 11(1), pages 75-96, March.
    13. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    14. Omran, Mohammed & Pointon, John, 2001. "Does the inflation rate affect the performance of the stock market? The case of Egypt," Emerging Markets Review, Elsevier, vol. 2(3), pages 263-279, September.
    15. Brooks,Chris, 2008. "Introductory Econometrics for Finance," Cambridge Books, Cambridge University Press, number 9780521694681.
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