Impact of macroeconomic indicators on stock market performance

The case of the Ghana Stock Exchange

The Authors

Anthony Kyereboah-Coleman, Department of Finance, University of Ghana Business School, Accra, Ghana

Kwame F. Agyire-Tettey, Department of Economics, University of Ghana, Accra, Ghana

Acknowledgements

The authors are particularly grateful to the anonymous referees for their insightful comments. All errors are, however, the responsibility of the authors.

Abstract

Purpose – The study aims at examining how macroeconomic indicators affect the performance of stock markets by using the Ghana Stock Exchange as a case study.

Design/methodology/approach – Quarterly time series data covering the period 1991-2005 were used. Cointegration and the error correction model techniques are employed to ascertain both short- and long-run relationships.

Findings – Findings of the study reveal that lending rates from deposit money banks have an adverse effect on stock market performance and particularly serve as major hindrance to business growth in Ghana. Again, while inflation rate is found to have a negative effect on stock market performance, the results indicate that it takes time for this to take effect due to the presence of a lag period; and that investors benefit from exchange-rate losses as a result of domestic currency depreciation.

Originality/value – The single most important contribution of this study is its emphasis on macroeconomic variables and stock market performance in a small country, since most studies have concentrated on stock markets and economic growth in advanced economies.

Article Type:

Research paper

Keyword(s):

Macroeconomics; Stock markets; Time series analysis; Ghana.

Journal:

The Journal of Risk Finance

Volume:

Number:

Year:

2008

pp:

365-378

Copyright ©

Emerald Group Publishing Limited

ISSN:

1526-5943

1 Introduction and background

Ghana embarked on economic reforms in 1983 at a time when the country's economy was virtually on the brink of collapse with inflation staggering around 123 percent. These reforms became necessary as Ghana's macroeconomic policies over the years had been characterized by periodic lapses in financial discipline leading to a volatile and generally high inflation, large exchange rate swings and negative real interest rates for extended period and consequently the build-up of large and unsustainable chunk of non-performing assets on the books of many commercial banks. The reforms generally laid emphasis on promoting market approach to development through trade and financial sector liberalization. Liberalizing the financial sector was identified as key to achieving positive real interest rates and improved efficiency of financial intermediaries. A remarkable achievement of these reforms was the complete overhaul of the financial system.

One institution that was established as part of the reforms was the Ghana Stock Exchange (GSE). The stock exchange, although was incorporated in July 1989 and started operations in 1990, it has its history dating back to 1961. On October 15, 1990, the GSE was given recognition to operate under the Exchange Act of 1971 and in 1994 it became a public company limited by guarantee. One major objective for the establishment of the GSE was to enable corporate institutions and government to raise quick capital to accelerate development in order to reduce undue reliance on donors, which had become the order of the day. In line with this objective, the GSE has gained prominence by facilitating tremendously the divestiture and privatization of some state-owned enterprises (SOE). In spite of its continuous, the country has not been able to move away from donor dependence. Is the exchange performing as expected? This and other questions are those the current study seeks to address.

1.1 Overview and performance of the Ghana Stock Exchange

The GSE currently has 33 listed companies and two corporate bonds. In October 2006, two and three year fixed rate Government of Ghana bonds were also listed. The two year bonds has coupons ranging between 15.8 and 17 percent per annum whilst the three year bonds carries coupon rates between 16 and 17.5 percent. Listed companies fall within the manufacturing, financial, mining and oil sectors. There are listing requirements some of which include capital adequacy, profitability, spread of shares, years of existence and management efficiency. The GSE performance is mainly monitored by the GSE all-share-index (GSI) which is a weighted index. Although, non-resident investors can deal in securities listed on the exchange without obtaining prior exchange control permission, there are some restrictions on portfolio investors not resident in Ghana. With regards to governance, the GSE is governed by a council with representation from licensed dealing members, listed companies, banks, insurance companies, the money market and the general public. The Securities and Exchange Commission is the regulator of the exchange.

In terms of behavior, the GSE enjoyed a bullish run between 2002 and 2004, with the GSE GSI rallying to reach an all period high of 7,316.31 (Figure 1) by close of August 2004. Indeed, the exchange was adjudged as the world's best-performing market at end of the first quarter of 2004 with a year return of 144 percent in $US terms compared to 30 percent return by Morgan Stanley Capital International Global Index, 26 percent Standard & Poor in the USA, and 32 percent in Europe, amongst others (Databank Group, 2004). This remarkable performance is attributed to a relatively stable and good macroeconomic performance during the period and a subsequent pick-up in investor and economic activity. Within the period, a number of new initial public offers were also introduced with the divestiture of shares of existing SOE on the exchange.

However, since 2005, the GSE has had a lackluster performance and assumed a bearish outlook in spite of the sustained macroeconomic stability and gains in the country. Some reasons have been offered in an attempt to explain this. The lackluster performance has been attributed to a number of factors including the fact that the market may be correcting itself due to overvaluation of equities during the 2004 bull runs. Again, it has been argued that previous petroleum price hikes fuelled inflation expectations which resulted in large diversions of funds away from shares in the stock market to short-term instruments in the money markets. Table I gives a snapshot of the performance of the GSE.

These reasons notwithstanding, the poor performance of the GSE continues to be puzzling. Current trends (Table I) in market indicators though show that the market appears to be picking up slightly in performance with a year-to-date change in the GSE GSI at 0.76 percent and market capitalization at 112,724 billion cedis as at January 2007.

Generally, the factors that have been identified as being responsible for the performance of the GSE include among others institutional as well as macroeconomic factors. Against this backdrop of mixed performance by the GSE, it is important to determine how the macroeconomic situation influences performance of the stock market in Ghana. This is more important because it has been asserted that the economic environment plays a significant role in determining the performance of the exchange and that overcoming the challenges facing the exchange depend to a large extent on government policies relating to the private sector, the monetary and fiscal policies, economic policies, financial sector reforms and the government's divestiture program. It is in this vacuum that this study is being carried out especially because other empirical studies on the GSE have looked at the impact of the stock exchange on economic growth which does not provide answers on issues related to how macroeconomic indicators affect the performance of the GSE. What is the direction and extent of impact of macroeconomic indicators on the performance of the GSE? As the stock market positions itself to take advantage of government policies and macroeconomic development, it is imperative to examine the relationship between stock market performance and macroeconomic indicators. Hence, this study will contribute to the debate on the behavior of the GSE vis-à-vis various indicators. Findings of the study will also be of immense benefit to academics, practitioners and policy-makers alike. The rest of the paper is structured as follows: Section 2 looks at review of relevant literature; Section 3 concentrates on methodology; Section 4 discusses empirical findings and; Section 5 concludes with policy recommendations.

2 Review of theoretical literature

2.1 Finance-economic growth nexus

Literature on finance and development to a great extent suggests that there is a relationship between financial system development, macroeconomic variables and economic development but the exact nature of the relationship has been inconclusive. Economists hold divergent views on the nature of interrelationships between financial and economic development.

Schumpeter (1933) analyzed the interactive mechanism between financial development and economic growth and came to the conclusion that in a sound economic setting with less government deficit and a dynamic private sector, the presence of banks will be able to innovate and supply long-term credit facilities to finance projects to promote growth in both the productive and financial sectors. In another study, Patrick (1996) analyzed the interrelationship between finance and economic development using his famous “supply-leading” and “demand-following” strategies. According to Patrick (1996) having in place a well-structured financial system that renders its services well in advance of effective demand (supply-leading) would induce economic development by transferring scarce resources from savers to investors according to the highest rates of return on investments. However, the theory did not hesitate to add that “ … .as the process of real growth occurs, the supply-leading impetus gradually becomes less important and demand-following response becomes dominant” (p. 174). Cameron et al. (1967) advancing the study on the development hypothesis view of money espoused by Gerschenkron (1962) came out with the conclusion that the introduction and utilization of new financial techniques and institutions in developing countries is comparable to technical innovation in industry. As such, the development of the financial sector promotes economic development provided that the banks efficiently allocate investable resources more efficiently than individual savers.

2.2 Credit markets and economic growth

Proponents of stock market development in developing countries (Arowolo, 1971; van Agtmeal, 1984; Drake, 1985) have argued for the positive contribution of stock markets to economic development. According to them, the conclusion that securities markets in developing countries do not continue to contribute to economic development might have resulted from the malfunctioning of these institutions but not from their inability to induce growth prospects in these countries. Gurley and Shaw (1955, 1960) and Goldsmith (1969, n.d.a, n.d.b) noted that as economies develop, self-financed capital investment first gives way to bank intermediated finance and later to the emergence of equity markets as an additional instrument for raising funds. Demirguc-Kunt and Levine (1996a, b) attributed the emergence and prosperity of specialized financial intermediaries and equity markets to the growth in the economy. According to Enberg, competitive pricing system is a prerequisite for capital markets to be able to raise domestic savings and contribute more efficiently to the allocation of such savings for economic growth because competition among the users of capital markets increases efficiency. In the capital market, people are encouraged or attracted to increase their current savings because the market adds a wide range of financial assets with different and varying risk characteristics, yield and maturity periods.

Writing on the effects of financial innovations and credit market evolution, Bhatt (1988) finds that capital markets come into being and evolve as a result of financial innovations that tend to reduce the risk and transaction costs to a level acceptable to both lenders and borrowers. He argues that the diffusion of innovations play an important role in the process of economic development through it impact on savings, investment and output. He concludes that in as much as credit and for that matter finance is recognized as one of the strategic factors that determine the pace of economic development, it should also be seen as a potential factor in distorting and obstructing the development process because of what Keynes termed as “the inherent instability of credit.” Capital markets provide an emporium for savers/lenders who seek returns and borrowers/investors who want to invest money in real productive assets to interact. In view of this, Sethness (1988) underscores the important role of capital markets providing capital for long-term structures that ensure liquidity of the financial system. The capital market, therefore, if vibrant and efficient will mobilize long-term savings for long-investment and eventual growth of the economy.

In an article on liquidity, capital markets and economic development, Levine (1977) defined liquid markets as those markets where it is relatively inexpensive to trade financial instruments and where there is little uncertainty about timing and settlement of those trades. He argues that there is a link between liquidity and economic development because some high-return projects require a long-run commitment of capital but savers do not want to surrender control of their savings for longer periods. The result is that if the financial system does not augment the liquidity of long-run investments, then fewer investments are likely to occur. He concludes that liquid markets simultaneously entice savers to give up their wealth (probably shortly) and convert these liquid financial instruments into long-term investable capital for the rather illiquid production process leading to economic growth. In spite of the above views that financial markets have positive effect on growth, other studies highlight a contrary view (Mayer, 1988; Stiglitz, 1989, 1994; Devereux and Smith, 1994; Shleifer and Summers, 1988; Morck et al., 1990). It must be pointed out that the performance and development of any economy is affected by the extent of changes and direction of macroeconomic variables.

2.3 Relationship between macroeconomic variables and the equity market

McKinnon-Shaw (1973) theories on finance and development criticized the dominant neo-classical monetary theories and the Keynesian counter arguments. The neo-classical monetary growth models postulate that high-positive interest rate have a direct impact on savings and investment. Within this school of thought, money is regarded as a substitute for physical assets and productive investments. Keynesian economists on the other hand argue that low-interest rate increases investment, income and eventually savings. McKinnon (1973) advances an argument in favor of a complementary relationship between financial and physical assets as opposed to the substitutability theory by the neoclassicals in a critique of the Keynesian theory. Paddy (1992) contends that macroeconomic and fiscal environment is one of the building blocks which determine the success or otherwise of securities market. Conducive macroeconomic environment promotes the profitability of business which propels them to a stage where they can access securities for sustained growth. Generally, the barometers for measuring the performance of the economy include among others real GDP growth rate, rate of inflation, the exchange rate, fiscal position and the debt position. Of these the exchange rate, interest rate and the rate of inflation can be singled out to affect stock market activity as they impinge directly on the state of corporate activity in the country.

Inflation affects savings and investment decisions through different channels. Generally, unanticipated inflation distorts the planning horizon of economic units. It lowers the real interest rate holding all other factors constant. With respect to savings, inflation has a negative impact on savings because it lowers the real interest rate and the latter having a positive impact on savings. Unstable inflationary dynamics heightens uncertainties regarding future prices and investment. Once there is a high degree of uncertainty in investment due to pricing mechanism, people resort to investing in physical assets. Again, inflation has the tendency of shifting investment portfolios towards short-term instrument due to inability of investors to forecast into the future. In highly unstable inflationary environment people will prefer to invest short instead of long. This will affect the demand for long-term instrument and the profitability of undertaking long-run projects.

Interest and exchange rates are financial prices for credit and foreign currencies, respectively. They both affect resource allocation, production levels, prices and profitability. Ultimately, fluctuations in these reflect in share prices – an indicator of market performance. For instance, lowering of interest rate on demand and savings deposits will improve returns to investing on the exchange relative to investing in deposit money banks (DMBs) holding factors such as risk, transaction costs, etc. constant. This will therefore increase the demand and share price of affected equities on the exchange thereby affecting its performance. The phenomenon of dollarization (investing in dollars) also becomes pervasive in an atmosphere of persistent exchange rate depreciation. This diverts resources that could be invested on the exchange into non-functioning assets (such as dollars). Real exchange rate depreciation could also result in capital flight thereby depriving the domestic economy of its investable financial resources.

Fiscal deficits lead to government interference in the financial markets with more attractive instruments that will crowd-out stocks (Pilbeam, 1992). An increase in government borrowing through the issuance of treasury bills affects the stock market through investors' re-adjustment of portfolio balances. Low treasury bill rates are expected to stimulate transfers of domestic funds from the money market to the stock market (Pilbeam, 1992). High and persistent fiscal deficits accommodated by the issuance of high yielding but less-risky government instruments like the Treasury bill adversely affect the demand for securities being issued by private firms for long-term capital. In this exposition, the impact of treasury bill rate also affects stock market activity much in the same way as interest on demand and savings deposits.

Agenor (2000) captures these views by stating that high inflation, large fiscal deficits and real exchange rate over-valuation are often key symptoms of macroeconomic instability which constraints private sector investment and savings and thereby results in inefficient allocation of resources on the exchange thereby affecting its performance. Empirically, Atje and Jovanovic (1993) found strong evidence to support the view that stock market development leads to economic growth. Using data from 1976 to 1993 on 41 countries including both developed and developing, Levine and Zervos (1996a, b) investigated the relationship between economic growth and stock market development. They found a strong positive correlation between the stock market development and long-run economic growth after controlling for the initial level of per capita GDP, initial level of investment in human capital, political instability and measures of fiscal and monetary policies as well as exchange rate policy.

Applying two-stage least squares, Harris (1997) did find evidence to support the view that stock market development explains economic growth. In fact, the results indicated that for developed countries stock market development had some explanatory power on economic growth but not on developing countries. He concluded that the pool of literature that leads us to believe that the existence of stock markets might enhance economic growth is misleading or at best weak. In Wai and Patrick's (1973) study, they argued that securities markets have generally not contributed to economic development of those countries that created them. Stiglitz (1989) also contends that the contribution of securities markets as a source of funds is limited because of fundamental problems of enforcement, adverse selection and incentives undermining the protection of investors.

Aidoo (1989) also reported several factors such as political instability, low-growth rate, lack of entrepreneurship and inadequate demand for stocks as some of the factors that are likely to influence the performance of the GSE. The study projected massive growth of the exchange in terms of demand and supply provided the economic and political conditions remained favorable.

3 Methodology

3.1 Data and sources

The study makes use of time series quarterly data spanning from the first quarter of 1991 to the last quarter of 2005, thus making use of 62 data points enough for effective regression analysis. The data were obtained from various sources. Data on treasury bill rates and the exchange rate were obtained from the International Financial Statistics monthly publications. Data on lending rate and rate of inflation were obtained from Bank of Ghana. The stock exchange performance variable is obtained from the GSE and Databank Financial Services likewise the AGC dummy.

3.2 Variable description and justification

3.2.1 GSE all-share-index (GSI)

This variable captures the overall performance of the market and it is the dependent variable in our regression analysis. A stock market index is a listing of stocks and a statistic reflecting the composite value of its components. It is used as a tool to represent the characteristics of its component stocks, all of which bear some commonality such as trading on the same stock market exchange, belonging to the same industry or having similar market capitalization. We settled on GSI because it captures all the other performance measures such as market capitalization, liquidity, and turnover ratio.

3.2.2 Inflation

High rates of inflation increase the cost of living and a shift of resources from stock market instruments to consumables. This leads to a reduction in the demand for market instruments which tends to reduce the volume of trading and thus value of traded stocks with no price increase. Market capital which is defined as the product of the share price and the outstanding shares may therefore fall as the demand for shares falls due to the substitution process. Inflation therefore is expected to have a negative impact on the market index and the performance of the exchange.

3.2.3 Real exchange rate

As the currency depreciates rapidly, capital flight affects exchange's trading volume and price index as funds are redirected outside. Foreign portfolio investors who play a major role on the GSE may also redirect their investments elsewhere to other more attractive markets (World Institute of Development Economics Research – WIDER, 1990). Real exchange rate depreciation therefore is expected to also have a negative impact on the performance of the exchange.

3.2.4 Interest rates

The impact of debt-equity ratios on the finances of listed companies would be examined through interest rate. The study used both the lending rate of DMBs and the 91-day treasury bill interest rates. Most governments raise money to finance deficits and invariably all the tools that exist tend to crowd-out the private sector as they push up the cost of capital. The basic advantage of the 91-day treasury bill is the fact that it is market based and therefore enhances resource allocation. Once, again the 91-day treasury bill has in-built flexibility mechanism that reduces administrative barriers. It must also be pointed out that data availability and accessibility equally informed the choice of this variable. High-lending rates tend to discourage companies from financing projects through loans from DMBs and thus resort to the rather less expensive but equally efficient equity financing. This promotes stock market activity by way of additional listings. High-treasury bill rates on the other hand tend to encourage investors to purchase more government instruments. Treasury bills thus tend to compete with stocks and bonds for the resources of investors. This tends to reduce the demand for stock market instruments and cause an eventual reduction in stock prices. The expected relationship between stock prices and Treasury bill rates is thus negative but positive with respect to lending rates.

3.2.5 AGC dummy

A dummy is introduced to take care of the structural effect of the listing of Ashanti Goldfields Company (AGC) on the market. The AGC, now AngloGold Ashanti is far the largest company listed on the market and it is therefore reasonable to discuss its expected influence on fundamental market attributes such as liquidity, volatility and turnover. Values of 0 and 1 are assigned, respectively, to the period before and after the listing of AGC on the GSE. The structural break experienced on the second quarter of 1994 confirms the impact of AGC on the stock market. Thus, Osei (1998) concludes that the listing of AGC has had tremendous impact on the growth of market capitalization, liquidity and the size of the market.

3.3 Model specification

To enable us undertake the empirical analysis of the relationship between the selected macroeconomic indicators and the performance of the stock market index, a macro-econometric model which is a modified version of Omole and Falokun (1996). The original model is an estimation of an unrestricted investment equation of the general accelerator type which included cash flows, leverage ratios – debt-capital and debt-equity ratio as additional regressors. Thus, we specify the following empirical model to be estimated: Equation 1 where, Gsi – the stock index; Inf – the rate of inflation; Ldr – the lending rate; Tbr – the treasury bill rate; Agc – the dummy representing the listing of AGC; α's are the coefficients of the variables and ɛ is the error term.

We take the logs of the variables in the above equation in order to be able to conduct a partial elasticity analysis, thus enabling us to assess the impact of a change in say inflation on the market Index, holding all other factors constant. Thus, our estimable equation (2) is: Equation 2 We do recognize the fact that private savings of both savings and time deposits play a major role in investment at the stock market. We however opted not to include this variable because the current study's concentration is essentially on the performance of the stock market using market capitalization as the main anchor and not necessarily investment at the market. This explains the exclusion of private savings from our model though it is an important variable on the stock market.

3.4 Estimation procedure

3.4.1 Unit-root test

In order to obtain a meaningful regression analysis, we first undertake a unit-root test to ascertain the stationarity or otherwise of the variables due to the use of time series data. In addition to the visual inspection of the corellogram of each individual series, two tests were used to test for the stationarity of the variables. Except where indicated, both tests were carried out only with an intercept term. The ADF test was carried out with one lag length. The null hypothesis of the test is that the data series being tested has a unit root. The unit root tests for stationarity were carried out on the logarithms of the data series in levels. The summary of the result of the unit-root test is presented Table II. The results obtained indicated that all the variables were not stationary in levels with the exception of the GSE GSI and the lending rate variables. The presence of unit roots in some of the data series is an indication of the existence of a possible long-run relationship among the variables. To ascertain the presence of the long-run relationship the next stage of the estimation is a test for cointegration and an error correction model (ECM).

3.4.2 Cointegration test

Engel and Granger (1987) introduced the concept of cointegration with regard to non-stationary variables. Ndung'u posits that variables in an econometric model may be non-stationary and then one is tempted to write and estimate the model by differencing each of the variables once. This process turns to break down the theories because such differencing takes away the long run response. There is the tendency for the variables to drift together overtime (i.e. have a long run relationship) and that necessitates a con-integration test. We employed the ADF test for the cointegration is conducted on the residuals generated from the model estimation of the variables in levels. In the estimation process, a dummy variable was introduced into the equation to capture the structural break that took place when AGC was listed on the market. The result of the cointegration test is presented Table III.

We therefore proceed to develop an ECM to test both the short- and long-run impact of macroeconomic impact on the performance of the GSE.

3.4.3 Error correction modeling

Since the results of the unit-root test on the residuals indicated the presence of a co-integrated relationship among the variables, the following ECM specification was estimated. The Engle-Granger representation theorem (Engel and Granger, 1987) stipulates that if two series are co-integrated then an ECM will represent them most efficiently, and furthermore, the dynamic specification will encompass any other dynamic specification including the partial adjustment model. Following Engel and Granger (1987), since the variables are co-integrated there is a long run relationship among them. To capture the long run behavior of the variables, the error correction term (ECT) (which is the lag of the residuals generated from the model estimated in their levels) is included in the short-run equation. The ECM specification is represented in equation (3): Equation 3 The result of the estimated ECM is presented below in Table IV. The DW test statistic of 1.93 is a strong indication of the absence of autocorrelation in the residuals and the adjusted R ² of 86 percent is indicative of the fact that 86 percent of the variations in the Gsi are explained by inflation, exchange, lending and the treasury bill rate. The array of diagnostic tests indicated that the model is consistent with the data. There is no evidence of first or higher order autocorrelation in the residuals. The normality test indicates that the distribution of the error term is independently and homoskedastically normal with no specification error.

4 Discussion of empirical results

The results obtained from the estimation of the ECM are presented in Table IV. Our results show that with the exception of the treasury bill rate, all the other variables are statistically significant at 1 percent level in explaining the variation in the performance of the GSE. The treasury bill rate was statistically significant at a weak 10 percent level. The lending rate having the negative coefficient supports the hypothesis that high-lending rates increases the cost of operation of firms listed on the exchange and therefore makes the shares of these firms less attractive. It must actually be stated that high-lending rates and excessive borrowing of government turn to crowd out the private sector; this has not helped the private sector and specifically the GSE to develop over the years. The coefficient of −1.95 shows how high-lending rates in Ghana are killing businesses. The coefficient shows that when there is an increase in the lending rate by 1 percent, the GSE performance declines by 1.95 percent. In an era, where there has been a declaration of the “golden age of business,” it must be pointed out that the right policies must be adopted to ensure a steady decline of lending rates.

Inflation as expected had a negative coefficient of −0.23 and this shows that an increase in the rate of inflation by 1 percent will result in the performance of the market declining by 0.23 percent. As it is the lag of inflation that turns to affect the performance of the market, it goes to show that it takes time for investors to adjust their portfolio due to the lagging effect when there is a change in inflation. The result shows that increase in the cost of operation of firms makes them less attractive and that reduces investors' confidence and interest in the market.

It was expected that listed equities will suffer from exchange rate losses and force investors to move out of the market, this is not the case as shown by the results. The variable did show a positive relationship with the stock market performance and it indicates the fact that the major movers of the market have actually benefited from the depreciation of the cedi as they do receive the proceeds from their sale on the international market in foreign currency. The treasury bill was statistically insignificant at 5 percent level. The listing of the AGC on the market did improve the market performance by 34 percent and goes to support the fact that the listing of AGC on the market has been one the major transformers of the exchange.

The ECM term which shows the speed at which adjustment occurs in the long-run equilibrium is negative and significant at 1 percent level. Since the absolute value is less one, it indicates a stable error correction mechanism which eventually converges to the long-run equilibrium level even when there is a departure from the short run equilibrium level. The negative coefficient of the ECT confirms the existence of long-run equilibrium relationship of the model. The speed of adjustment to the long run equilibrium level is 54 percent as shown by the coefficient of the ECT. This suggests that 54 percent of any previous disequilibrium in the long run will be corrected in the short term.

5 Conclusions

The purpose of this was to empirically investigate the effects that macroeconomic indicators do exact on the performance of stock markets using the GSE. The rationale behind the study is that globally stock markets are regarded as financial institutions where funds can be raised in order to finance investment so as to achieve high-economic growth and hence development. Most of the studies carried o stock markets have rather concentrated on its linkage with economic growth and mostly in advanced countries. It was therefore deemed appropriate to examine the impact of macroeconomic fundamentals on the performance stock markets from a small country dimension as these fundamentals have not been stable over the years.

The treasury bill rate variable was found to have a positives and but statistically weak effect on the performance of stock markets. The lending rate which is a very important determinant when it comes to the direction of the flow of funds in a country showed it has considerable effect on the performance of the performance of the exchange. Also it was found that the high-lending rate was impacting negatively on business in Ghana. Inflation was found to have adverse affect on the performance of the market but result indicated that the present inflation level does not have any effect on market performance but rather it takes time for the market to react to changes in the inflation rate. Contrary to what was expected, equities on the market were not affected by exchange rate losses and that investors benefited from the market when the cedi depreciates.

With these results it is important to highlight that there is the need to implement prudent macroeconomic policies in order for a country to derive maximum benefits from stock markets. In order to enable the capital market in general and stock market in particular to take full advantage of the various opportunities and cope with challenges, interest rates, inflation, must be reduced. This must be done in relation to appropriate monetary policies to ensure macroeconomic stability. The main limitation is the use of one country. We therefore hope to broaden the study more than one country data permitting in order to draw stronger conclusions.

Equation 1

Equation 2

Equation 3

Figure 1Performance of the GSE

Table IGSE market indicators

Table IIUnit-root test on variables

Table IIIResults of unit-root test on residuals of equation (2)

Table IVResults of the ECM

References

Agenor, P.R. (2000), The Economics of Adjustment and Growth, Academic Press, New York, NY, .