Macroeconomic Variables and Stock Market Returns in Ghana: Any Causal Link?

The purpose of the study is to examine the existence of causality between macroeconomic variables and stock returns in Ghana. The study employs monthly time series data spanning the period January 1995 to December 2010. Unit root test is performed using ADF, PP and KPSS tests. Then, Vector Error Correction (VECM) model is used to establish long-run and short-run relationship between stock performance and macroeconomic variables. In order to determine the existence or otherwise of causality, the Granger Causality tests is performed. Impulse response functions and forecast error variance decomposition are used to assess the stability of the relationship between stock returns and macroeconomic variables over time. The study reveals that a significant long run relationship exists between stock returns and inflation, money supply and Foreign Direct Investment (FDI). In the short-run, a significant relationship exists between stock returns and macroeconomic variables such as interest rate, inflation and money supply. In the short-run the relationship between stock returns and FDI is only imaginary. Our VECM coefficient shows that it takes approximately 20 months for the stock market to fully adjust to equilibrium position in case a macroeconomic shock occurs. Lastly, a causal relationship running from inflation and exchange rate to stock returns has been established. Then also, a causal relationship running from stock returns to money supply, interest rate and FDI has also been revealed. The findings imply that arbitrage profit opportunities exist in the Ghana stock market contrary to the dictates of the Efficient Market Hypothesis (EMH). In terms of original value,among the studies done on the topic in Ghana so far, this is the only study that incorporates dividend in the computation of returns on the Ghana Stock Exchange.