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Effect of Macroeconomic Variables on the Ghanaian Stock Market Returns: A Co-integration Analysis

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  • Kuwornu, John K.M.

Abstract

This study investigates the effect of macroeconomic variables on the Ghanaian stock market returns using monthly data over period January 1992 to December, 2008. Macroeconomic variables used in this study are consumer price index (as a proxy for inflation), crude oil price, exchange rate and 91 day Treasury bill rate (as a proxy for interest rate). The study employs the Johansen Multivariate Co-integration Procedure. The empirical results reveal that there is co-integration between the four macroeconomic variables and stock returns in Ghana indicating long run equilibrium relationship. Further, the results reveal that; in the short run, Treasury Bill Rate significantly influences the stock returns, with and an elasticity of 0.005, implying that a 1% rise in the Treasury bill rate will lead to a 0.005% rise in the stock returns. The inflation rate is also significant at 1% with elasticity -0.135744, implying that a 1% increase in inflation rate will decrease stock returns by 0.14 %. The residual value of 0.785548 of the Error Correction Model indicates that about 79% of the deviations of the stock returns are corrected in the short run, which is quite high and encouraging for an emerging market like the Ghana Stock Exchange. In the long run, however, the stock returns are significantly influenced by Inflation rate, Crude oil prices, Exchange rate, and Treasury bill rate, with elasticities of 0.5479, -0.03021, 0.05213, and 0.00322 respectively. Crude oil price is negatively related to stock returns; 1% rise in Crude oil prices will decrease returns by 0.03%. Also a 1% increase in inflation rate increases stock returns by 0.54%; and a 1% rise in exchange rate increases stock returns by 0.052%. The effect of Treasury bill rate is highly inelastic with elasticity of 0.003. In both the short run and the long run results, inflation rate appears to be the most influential macroeconomic variable affecting stock market returns in Ghana. The results also reveal that investors are not compensated for inflationary increases in the short run, but are compensated in the long run. These results have implications for financial analysts, fund managers and policy makers.

Suggested Citation

  • Kuwornu, John K.M., 2012. "Effect of Macroeconomic Variables on the Ghanaian Stock Market Returns: A Co-integration Analysis," AGRIS on-line Papers in Economics and Informatics, Czech University of Life Sciences Prague, Faculty of Economics and Management, vol. 4(2), pages 1-12, June.
    • Handle: RePEc:ags:aolpei:131359
    DOI: 10.22004/ag.econ.131359
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    2. Muhammad Kamran Khan & Jian-Zhou Teng & Javed Pervaiz & Sunil Kumar Chaudhary, 2017. "Nexuses between Economic Factors and Stock Returns in China," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(9), pages 182-191, September.
    3. Pooja Joshi & A. K. Giri, 2015. "Cointegration and Causality between Macroeconomic variables and Stock Prices: Empirical Analysis from Indian Economy," Business and Economic Research, Macrothink Institute, vol. 5(2), pages 327-345, December.
    4. Richard Kofi Asravor & Prince Dieu‐Donne Fonu, 2021. "Dynamic relation between macroeconomic variable, stock market returns and stock market development in Ghana," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 2637-2646, April.
    5. Emran Hasan & Shahanawaz Sharif, 2019. "Do Macroeconomic Variables Affect Stock Market Performance? A Case Study of DSEX and DS30 Index of Dhaka Stock Exchange," Business and Economic Research, Macrothink Institute, vol. 9(3), pages 182-203, September.
    6. Sri Utami Ady, 2021. "The Effect of World Oil Prices, Gold Prices, and Other Energy Prices on the Indonesian Mining Sector with Exchange Rate of Indonesian Rupiah as the Moderating Effect," International Journal of Energy Economics and Policy, Econjournals, vol. 11(5), pages 369-376.
    7. Neifar, Malika, 2023. "Macroeconomic Factors and UK Stock Market: Evidence through the Non-Linear ARDL model," MPRA Paper 116298, University Library of Munich, Germany.
    8. Haruna Issahaku & Yazidu Uztarz & Paul Bata Domanban, 2013. "Macroeconomic Variables and Stock Market Returns in Ghana: Any Causal Link?," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 3(8), pages 1044-1062, August.
    9. Joseph Emmanuel Tetteh & Anthony Amoah & Deodat Emilson Adenutsi, 2019. "Drivers of Stock Market Returns in Sub-Saharan Africa: Evidence from Selected Countries," Asian Development Policy Review, Asian Economic and Social Society, vol. 7(3), pages 191-208, September.
    10. Mtero, Charles Tapedza & Runganga, Raynold, 2021. "Inflation and Stock Market Returns in Zimbabwe: Comparison Among the GARCH, EGARCH and TGARCH Models," MPRA Paper 112408, University Library of Munich, Germany, revised 15 Mar 2022.

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