Mpact of Macroeconmic Variables on Equity Returns

MP A R

Munich Personal RePEc Archive

Macroeconomic Factors and Stock Market Movement: Evidence from Ghana

Adam, Anokye M. and Tweneboah , George

October 2008

Online at http://mpra.ub.uni-muenchen.de/11256/ MPRA Paper No. 11256, posted 26. October 2008 / 00:19

Macroeconomic Factors and Stock Market Movement: Evidence from Ghana By Anokye M. Adam School of Management, University of Leicester, UK E-mail: ano77chie@yahoo.co.uk or ma262@le.ac.uk And

George Tweneboah School of Management, University of Leicester, UK E-mail: opokutweneboah@yahoo.com or gt56@le.ac.uk

Abstract This study examines the role of macroeconomic variables on stock prices movement in Ghana. We use the Databank stock index to represent Ghana stock market and (a) inward foreign direct investments, (b) the treasury bill rate (as a measure of interest rates), (c) the consumer price index (as a measure of inflation), and (d) the exchange rate as macroeconomic variables. We analyze both long-run and short-run dynamic relationships between the stock market index and the economic variable with quarterly data for the above variables from 1991.1 to 2006.4 using Johansen's multivariate cointegration test and innovation accounting techniques. We established that there is cointegration between macroeconomic variables identified and Stock prices in Ghana indicating long run relationship. Results of Impulse Response Function (IRF) and Forecast Error Variance Decomposition (FEVD) indicate that interest rate and Foreign Direct Investment (FDI) are the key determinants of the share price movements in Ghana. Keywords: Cointegration, Innovation Accounting, Foreign Direct Investment (FDI) JEL Classification: C22, E44, G10

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1. Introduction The relationship between macro economic factors and stock market development has dominated in the academic and practitioners’ literature over the past decades. Some fundamental macroeconomic variables such as exchange rate, interest rate, industrial out...