The short and long run dynamic effect of macroeconomic fundamentals on stock market performance: evidence from Ghana

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This study focused on examining the impact macroeconomic fundamentals have on the performance of the Ghanaian stock market in both the short and long run. The study utilized an autoregressive distributed lag (ARDL) model to analyse monthly data covering the period September 2005 to December 2017 in a bid to understand how macroeconomic fundamentals including money supply, inflation, interest rates and exchange rates explain the movements in Ghana’s stock market returns. The results from the long run analysis revealed that both interest rates and exchange rates share negative significant long run relationships with Ghana’s stock market returns. Further, the results suggest that expansionary monetary policies in Ghana exert upward pressures on stock prices and by extension market returns. Trade volume employed to proxy market liquidity as a control is also observed to share a significant positive relationship with market returns. The short run analysis using the error correction representation found only interest rate to have a significant positive association with market performance in the short run. The results generally suggest that changes in macroeconomic factors such as interest rates, exchange rates and money supply significantly influence the direction of stock return movements in Ghana’s market giving the implication that changes in interest rates, exchange rate and money supply should generally be considered in making investment decisions in the Ghanaian market. Having made these findings, the study recommends that policy makers frame macroeconomic policies that will appreciate and stabilize the Ghana cedi and during periods of low economic activity, provide some form of economic stimulus by reducing interest rates or increasing money supply so as to ensure stability and enhance market performance
A thesis submitted to the department of accounting and finance college of humanities and social sciences in partial fulfillment of the requirements for the degree of mba finance