Examining the relationship between macroeconomic variables and stock prices. Evidence from the Ghana stock exchange

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July, 2015
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The growth and development of the capital market are very crucial for investment, economic growth and development. However, the market is affected by a number of factors out of which macroeconomic variables have attracted massive interest of research. A lot of such studies focused on the advanced economies. However, in recent years, huge amounts of funds are flowing into emerging economies as a result of liberalization and increased liquidity. Thus, conducting a study to examine the relationship between macroeconomic variables and stock prices of developing economies becomes more imperative. This study is conducted to examine the long run, short run and causal relationship between stock returns in Ghana and macroeconomic variables such as inflation, broad money supply, monetary policy rate and exchange rate. Secondary data is sourced for the study. Monthly data from January 1995 to December 2014 are analysed. Dickey Fuller Unit root test, Johansen cointegration test and Granger causality test are conducted to analyse the time series data. The results confirm the existence of a long-run relationship among the Ghana Stock Exchange Composite Index, inflation, exchange rate, monetary policy rate and broad money supply. The results further reveal that inflation and broad money supply have significant short run negative relationship with stock returns. Also, the results reveal that inflation and money supply granger cause stock return. The study recommends, among others that Bank of Ghana undertakes measures to control money supply.
A Thesis Submitted to the School of Graduate Studies, Kwame Nkrumah University of Science and Technology, Kumasi, in partial fulfilment of the requirements for the degree of Master of Business Administration Finance,