Effect of Macroeconomic Factors on Stock Prices in Ghana: A Vector Error Correction Model Approach

Abstract

This study examines the effect of macroeconomic variables on stock prices in Ghana. Analysis was done using monthly data from 1991.4 to 2010.8. This study employed cointegration test and vector error correction models (VECM) to examine both long-run and short-run dynamic relationships between the stock market index and the macroeconomic variables. Generalized impulse function (IRF) and forecast error variance decomposition (FEVD) were used to detect the effect of shocks in the macroeconomic factors on complete time path of stock prices and vice versa. The time series properties of the data were, first, analyzed using the Augmented Dickey-Fuller (ADF) and Phillips- Perron tests. The empirical results derived indicate that all the variables were stationary after their first differencing. The paper established that there is cointegration between macroeconomic variables and Stock prices in Ghana indicating long run relationship. The above long term relation indicates that Interest Rate (TB) and Exchange Rate (XR) have a negative effect on Stock Prices whiles Inflation (CPI) showed a positive effect on Stock Prices (DSI). Results of Impulse Response Function (IRF) and Forecast Error Variance Decomposition (FEVD) indicate that the macroeconomic variables identified a low significant influence on share price movements in Ghana.