The relationship between interest rate and stock price. Empirical study on Ghanaian listed firms

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MAY, 2016
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The issue of whether stock prices and interest rate are related or not, is an important one especially with increased international trade and the integration of global financial markets. A fall in interest rates on money market instruments like treasury, fixed deposits and call accounts make them less attractive in terms of the returns they yield. Investors typically react to such a fall by transferring their investments in stock market. The study therefore set out to investigate the impact of interest rate on stock prices in Ghana by employing OLS model with monthly data spanning from January, 2000 to September, 2010. The study further used Granger causality test to determine the direction of causality between interest rate and stock prices in the context of Ghana. The empirical results indicated that interest rate had a significant negative effect on stock price in Ghana. The study also revealed that there existed a direct relationship between inflation and stock price and it was found to be significant. Further, it was found that the changes in stock prices are explained by the variations in interest rate whereas the changes in stock price do not in turn influence the changes in interest rate. This means that there is unidirectional causality between interest rate and stock prices as in the case of Ghana. It was suggested that in an attempt to positively influence the All-Shares index, government can resort to the use of expansionary fiscal policy measures since it was found that government activities affect the market index positively.
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A thesis submitted to The Department of Economics, Kwame Nkrumah University of Science and Technology, in partial fulfillment of the requirement for the award of Master of Science Degree in Economics, 2016
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