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Effect of Macroeconomic Factors on Stock Prices in Ghana: A Vector Error Correction Model Approach

Author

Listed:
  • Kwame Mireku

    () (Kwame Nkrumah University of Science and Technology)

  • Kwaku Sarkodie

    () (Assemblies of God Senior High School)

  • Kwasi Poku

    (Kwame Nkrumah University of Science and Technology)

Abstract

This study examines the effect of macroeconomic variables on stock prices in Ghana. Analysis was done using monthly data from 1991.4 to 2010.8. This study employed cointegration test and vector error correction models (VECM) to examine both long-run and short-run dynamic relationships between the stock market index and the macroeconomic variables. Generalized impulse function (IRF) and forecast error variance decomposition (FEVD) were used to detect the effect of shocks in the macroeconomic factors on complete time path of stock prices and vice versa. The time series properties of the data were, first, analyzed using the Augmented Dickey-Fuller (ADF) and Phillips- Perron tests. The empirical results derived indicate that all the variables were stationary after their first differencing. The paper established that there is cointegration between macroeconomic variables and Stock prices in Ghana indicating long run relationship. The above long term relation indicates that Interest Rate (TB) and Exchange Rate (XR) have a negative effect on Stock Prices whiles Inflation (CPI) showed a positive effect on Stock Prices (DSI). Results of Impulse Response Function (IRF) and Forecast Error Variance Decomposition (FEVD) indicate that the macroeconomic variables identified a low significant influence on share price movements in Ghana.

Suggested Citation

  • Kwame Mireku & Kwaku Sarkodie & Kwasi Poku, 2013. "Effect of Macroeconomic Factors on Stock Prices in Ghana: A Vector Error Correction Model Approach," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 3(2), pages 32-43, April.
  • Handle: RePEc:hur:ijaraf:v:3:y:2013:i:2:p:32-43
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    References listed on IDEAS

    as
    1. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
    2. Adam, Anokye M. & Tweneboah, George, 2008. "Macroeconomic Factors and Stock Market Movement: Evidence from Ghana," MPRA Paper 11256, University Library of Munich, Germany.
    3. Gjerde, Oystein & Saettem, Frode, 1999. "Causal relations among stock returns and macroeconomic variables in a small, open economy," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(1), pages 61-74, January.
    4. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    5. 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.
    6. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    7. Foresti, Pasquale, 2006. "Testing for Granger causality between stock prices and economic growth," MPRA Paper 2962, University Library of Munich, Germany, revised 2007.
    8. Mathias Binswanger, 2000. "Stock returns and real activity: is there still a connection?," Applied Financial Economics, Taylor & Francis Journals, vol. 10(4), pages 379-387.
    9. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    10. Gultekin, N Bulent, 1983. " Stock Market Returns and Inflation: Evidence from Other Countries," Journal of Finance, American Finance Association, vol. 38(1), pages 49-65, March.
    11. Maysami, Ramin Cooper & Koh, Tiong Sim, 2000. "A vector error correction model of the Singapore stock market," International Review of Economics & Finance, Elsevier, vol. 9(1), pages 79-96, February.
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