Stock Market Development and Economic Growth in Ghana. A Granger Causality Analysis.

Abstract

The study examined the causal relationship between stock market development and economic growth in Ghana. Annual series from 1991-2014 were converted to quarterly series with the Boot-Feibes-Lisman (1967) derivative, and generated principal components to proxy dimensions of stock market development (Accessibility, Efficiency, Stability, and Size) as well as some economic growth variables (human dimension measures of economic growth). Testing for stationarity, it was noted that all the variables were stationary at levels, hence, the study could not carry out a Johansen-Juselius (1992) Cointegration Test to observe long-run relationships as well as a VECM to note the speed of adjustments. For that reason, the study carried out an unrestricted VAR to test for short-run dynamics and a Granger Causality Analysis to determine the direction of the short-run relationships. Significant causal relations in the short-run, with both bi-directional and uni-directional relations were observed between some of the dimensions of stock market development and both dimensions of economic growth in Ghana. Significant short-run relations running from GDP Growth to the dimension of Efficiency and vice versa as well as from GDP Growth to the Stability were noted. Similarly, significant short-run relations were noted to run only from the quality of life dimension to the dimensions of Efficiency and Stability of stock market development in Ghana. Furthermore, Bi-directional causation existed between GDP Growth and the dimension of Efficiency and uni-directional causation from GDP Growth to Stability as well as from Quality of Life to the dimensions of Efficiency and Stability of stock market development. This study provides policymakers with a sense of direction in terms of policies to improve upon with particular attention to the significant dimensions. The study aids in improving policy interventions given limited resources to enhance stock market activities for general development. It is recommended that future studies should consider examining causality with other techniques to check for consistency of findings to improve policy implications.