An Econometric Analysis of the Impact of Macroeconomic Fundamentals on Stock Market Returns in Ghana

Muazu Ibrahim · Alhassan Musah

44 citations0/0 files storedResearch in Applied Economics

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Financial Markets and Investment Strategies Monetary Policy and Economic Impact Market Dynamics and Volatility

Abstract

Relying on more recent data spanning September, 2000 to September, 2010, this paper investigates the effects of macroeconomic variables on stock market returns by employing the Johansen multivariate cointegration approach and vector error correction model (VECM). We present evidence of a long-run relationship between macroeconomic variables and stock returns. Our Granger causality test however could not establish causality from any direction between macroeconomic variables and stock prices and that earlier literature that found causality between the series may be misleading. Results from both the impulse response functions and variance decomposition show that among the macroeconomic variables, shocks to inflation, money supply and exchange rate do not only explain a significant proportion of the variance error of stock returns but their effects persist over a long period.

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References

1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1992The Cross-Section of Expected Stock Returns 1988Statistical analysis of cointegration vectors 1990MAXIMUM LIKELIHOOD ESTIMATION AND INFERENCE ON COINTEGRATION — WITH APPLICATIONS TO THE DEMAND FOR MONEY 1991Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models 1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]1986Economic Forces and the Stock Market 2010

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