Abstract:
The study examines the impact of macroeconomic variables (inflation, exchange rate, and interest
rate) on stock market performance in Ghana using quarterly data ranging from 2008 to 2018. Using
time-series techniques of co-integration and vector error correction estimation, the study examines
both the short-run and long-run associations between macroeconomic variables and stock market
performance.
The study uses the GSE all-share index as a dependent variable to measure stock market
performance. Stationarity test done using the Augmented Dickey Fuller (ADF) test shows that the
variables used for the study are all non-stationary at levels but stationary at first difference, hence
justifying the use of the Johansen’s co-integration and Vector Error Correction techniques. The
Johansen’s co-integration test indicates the existence of long-run negative relationships among
GSE all-share index and the macroeconomic variables (inflation rate, exchange rate, and interest
rate) in Ghana, whilst the Vector Error Correction Model reveals no short-run relationship between
these variables. There is also evidence of a uni-directional causative association running from
inflation rate, exchange rate and interest rate to stock market performance using the Granger
causality test. The study shows that macroeconomic variables (inflation, exchange rate, and
interest rate) hinder stock market performance in Ghana in the long-run. All variables are
statistically significant at 5% significance level in the long-run. The speed of adjustment towards
the long-run equilibrium is about 21.3%, indicating that the adjustment is slow. Based on the
findings, the study recommends that in an attempt to encourage the stock exchange market through
various policies, policymakers should try to implement joint policies that will improve both the
stock market and the macroeconomic variables in Ghana.
