Statistical Analysis of the Effect of Inflation and Exchange Rate on Stock Market Returns in Ghana
Abstract
The study examined the effect of exchange rate and inflation on stock market returns in Ghana.
Monthly inflation and exchange rate data obtained from the Bank of Ghana and monthly market
returns computed from the GSE all-share index from January 2000 through to December 2013
was used. The Autoregressive Distributed Lag (ARDL) cointegration technique, the Error
correction parametization of the ARDL model and Markov transition probabilities were used in
unveiling this dynamics. The ARDL and its corresponding error correction model were used in
establishing the long and short run relationship between the Ghana Stock Exchange (GSE)
market returns, inflation and exchange rate. The study revealed that there exist a significant long
run relationship between GSE market returns and inflation. However, there existed no significant
short run relationship between them. The result also showed a significant long and short run
relationship between GSE market returns and exchange rate. Furthermore, due to the existence of
the long run relationships, Markov transition probabilities were used to determine the long run
distributions of inflation and exchange rate. The study also revealed that in the long run there is a
high probability that the cedi will depreciate against the dollar and also there is a high probability
that inflation will lie between 10% and 20% inclusive in the long run.
Description
Thesis(MPhil)-University of Ghana, 2015
Keywords
Statistical Analysis, Inflation, Exchange Rate, Stock Market Returns