The relationship between Interest Rate and performance of the Ghanaian stock market

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2010-07-05
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Abstract
This study investigates the relationship between interest rate and stock performance using a monthly time series data from the Ghana Stock Exchange for the period 1992 to 2006. Data on stock performance, proxied by the All-Share Index, the interest rates also measured by the Treasury bill rate, were obtained from the Ghana Stock Exchange and Bank of Ghana respectively. The analysis began with a test for the unit root characteristics of the variables, as a regression involving nonstationary series yield spurious outcomes. Using the traditional unit root test procedure, the Augmented Dickey Fuller (ADF) test, the series were found to be integrated of order one (1). Johansen and Julius trace and maximum eigenvalue test for cointegration were carried out to test for the existence of long run relationship among the variables; this was followed by the estimation of the vector error correction model, which estimates the short and long run impact relationship between stock performance and interest rates, after controlling for other exogenous factors including money supply. The study found no cointegrating relationship among the covariates. The study therefore estimated an Ordinary Least Squares (OLS) regression of the impact of interest rates on stock prices using differenced series of all variables. The study found a significant short run impact of interest rates on stock performance. A Granger Causality test was also performed to test the existence of a reverse casual effect of interest rates and stock performance. The findings suggested a bi-causal link between stock performance and interest rates.
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A Thesis submitted to the Institute of Distance Learning, Kwame Nkrumah University of Science and Technology in partial fulfillment of the requirements for the degree of Commonwealth Executive Master of Business Administration.
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