How powerful are Macroeconomic variables in the Stock market? The case of Ghana

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JUNE 2016
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Even though there have been studies on the effects economic variables have on the stock market, these studies have predominantly been in the developed world context. Thus, the present paper is important as it brings to the fore new evidence on the relationship between stock market behavior and selected macroeconomic indicators of the developing world setting. Overall, the study fills a gap in knowledge by investigating the relationship between macroeconomic variables (namely exchange rate, interest rate and inflation rate) and stock market returns using the GSE All Share Index as a proxy to stock returns during the fifteen year period spanning January 2000 to December 2014. Three models formed the foundation of the study namely the Impulse response model, the Markowitz Portfolio Theory and the Stock Market Efficiency (SME) hypothesis. Findings of the study revealed that macroeconomic variables were important predictors of stock market returns in Ghana during the period under study. One unit root increases in exchange rate, interest rate and inflation rate caused stock market returns to increase by 0.015, 0.006 and 1.677 units respectively. It was also found that exchange rate and inflation rate had a positive correlation whiles interest rate had a negative correlation with the GSE All Share Index. The multiple regression results obtained from the stationary first differenced data series established a positive effect of interest rate and inflation rate on stock market returns, and a negative effect of interest rate on stock market returns. Importantly, all of the relationships examined were found to be statistically significant.
A thesis submitted to the Department of Economics, Kwame Nkrumah University of Science and Technology, Kumasi in partial fulfilment of the requirement for the award of an Msc Economics degree.