A Study of the Effect of Inflation and Exchange Rate on Stock Market Returns in Ghana

The study examined the effect of exchange rate and inflation on stock market returns in Ghana using 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 to December 2013. The autoregressive distributed lag (ARDL) cointegration technique and the error correction parametization of the ARDL model were used for examining this effect. 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 result of the study showed that there exists a significant long-run relationship between GSE market returns and inflation. However, no significant short-run relationship between them existed. The result also showed a significant long- and short-run relationship between GSE market returns and exchange rate. The variables were tested for long memory and it was observed that such property did exist in these variables, making it a desirable feature of which investors can take advantage of. This is due to the establishment of long-run effect of inflation and exchange rate on stock market returns

Does inflation has an Impact on Stock Returns and Volatility? Evidence from Nigeria and Ghana

This study seeks to apply the generalized autoregressive conditional heteroskedasticity (GARCH) model to assess the impact of inflation on stock market returns and volatility using monthly time series data from two West African countries, that is, Nigeria and Ghana. In addition, the impact of asymmetric shocks was investigated using the quadratic GARCH model developed by Sentana (1995), in both countries. Results for Nigeria show weak support for the hypothesis which states that bad news exert more adverse effect on stock market volatility than good news of the same magnitude; while a strong opposite case holds for Ghana. Furthermore, inflation rate and its three month average were found to have significant effect on stock market volatility in the two countries. Measures employed towards restraining inflation in the two countries, therefore, would certainly reduce stock market volatility, improve stock market returns and boost investor confidence.Stock Returns, Volatility, inflation

Regional Integration of Equity Markets in Sub-Saharan Africa

Equity markets in developing and emerging economies have grown in number and importance as a result of financial market globalisation. However, their role in economic growth and development is enhanced if nascent markets are integrated with well-established ones. Market integration, measured by the transmission of returns volatility, is identified across a sample of SSA countries, using a unique dataset. Evidence for potential integration between financial markets in Sub-Saharan Africa (SSA) is found. Spillovers are found across markets, some unidirectional and others bi-directional. However, continued illiquidity and incomplete institutions indicate that an integrated financial community remains premature, and considerable regulatory reform and harmonisation will be necessary for this to succeed

Do macroeconomic variables play any role in the stock market movement in Ghana?

This study examines the impact of macroeconomic variables on stock prices. We use the Databank stock index to represent the stock market and (a) inward foreign direct investments, (b) the treasury bill rate (as a measure of interest rates), (c) the consumer price index (as a measure of inflation), (d)Average crude oil prices , and (e) the exchange rate as macroeconomic variables. We analyse quarterly data for the above variables from 1991.1 to 2007.4. employing cointegration test, vector error correction models (VECM). These tests examine both long-run and short-run dynamic relationships between the stock market index and the economic variables. The paper established that there is cointegration between macroeconomic variable and Stock prices in Ghana indicating long run relationship. The VECM analyses shows that the lagged values of interest rate and inflation has a significant influence on the stock market. The inward foreign direct investments, the oil prices , and the exchange rate demonstrate weak influence on price changes. In terms of policy implication, the establishment of lead lag relation indicate that the DSI is not informational efficient with respect to interest rate, inflation inward FDI, Exchange rate and world Oil prices.Stock Market, Cointegration, Toatl derivative, Stock duration, partial differentiation

Does Macroeconomic Indicators exert shock on the Nigerian Capital Market?

This study examines the long-run and short-run effect of macroeconomic variables on the Nigerian capital market between 1984 and 2007. The properties of the time series variables are examined using the Augmented Dickey-Fuller (ADF) test and most of the variables have a unit root at level. The Augmented Engle-Granger Cointegration test revealed that macroeconomic variables exert significant long-run effect on stock market performance in Nigeria. Also, the employed Error Correction Model (ECM) showed that macroeconomic variables exert significant short-term shock on stock prices as a result of the stochastic error term mechanisms. However, the empirical analysis showed that the NSE all share index is more responsive to changes in exchange rate, inflation rate, money supply and real output. While, all the incorporated variables which serve as proxies for external shock and other macroeconomic indicators have simultaneous significant impact on the Nigerian capital market both in the short and long-run.Economic Shock; Macroeconomic Variables; Capital Market; Unit root and Cointegration.

Exchange reform, parallel markets, and inflation in Africa : the case of Ghana

This paper presents a theoretical framework to analyze the issue of exchange rate reform in the presence of parallel markets. In Ghana, which has carried out one of the most thorough structural adjustment programs in Africa, an increasingly high inflation rate has been attributed to major devaluations of the official exchange rate. The authors dispute this conclusion based on careful testing and simulations using a macroeconomic model estimated with Ghanaian data. This model also shows that there is no direct relationship between the official exchange rate and inflation. The results also show that official devaluation had a postive effect on Ghana's budget. Revenue improvements came from three channels: the higher grant aid disbursed at a more depreciated exchange rate, a reduction in the subsidies that had accrued to importers through an overvalued exchange rate, and an increase in export taxes as cocoa farmers increasingly marketed their output through official channels. The official devaluation therefore did not produce higher budget deficits, demand pressure did not spill onto the parallel market, and the exchange premium narrowed considerably. The key to the success of the program was the adequate level of foreign financing, combined with a coherent set of fiscal policies.Access to Markets,Economic Theory&Research,Environmental Economics&Policies,Economic Stabilization,Markets and Market Access

Foreign portfolio investments, exchange rates and capital openness : a panel data approach

Purpose: The aim of this paper is to examine the effect of real exchange rate and capital openness on foreign portfolio investments, using a panel of nine African countries, after the global financial crisis in the period 2009 -2016. Design/Methodology/Approach: We adopted a panel data approach, and more specifically data was analysed using the Fixed Effects model. The economic data was sourced from the World Bank database of development indicators, while we used Chinn and Ito’s database for capital openness. Findings: Building on from the international finance and portfolio behaviour theories, the results show that real exchange rates, capital openness and the rate of inflation have a negative relationship with FPI inflows. On the contrary, the lag of FPI, institutional quality, real economic growth rate and stock market development attract inward FPI, as portrayed in the positive relationship between the dependent and independent variables. Practical Implications: In accordance with these findings, we find that, host countries’ governments that adopted fiscal and monetary policies can ensure macroeconomic stability, and a prudently managed exchange rate through incentivising exports and discouraging imports into the host country, to attract inward FPI flows. Originality/Value: The study confirms the theoretical and empirical underpinnings that there is a negative relationship between foreign portfolio investment, and real exchange rates and capital openness, respectively in most developing countries, and African economies are no different.peer-reviewe

Calendar Anomalies in an Emerging African Market: Evidence from the Ghana Stock Exchange.

This paper investigates two calendar anomalies in an emerging African market. Both the day of the week and month of the year effects are examined for Ghana. The latter is an interesting case because i) it operates for only three days per week during the sample period and ii) the increased focus that African stock markets have received lately both from academics and practitioners. We employ rolling techniques to asses the affects of policy and institutional changes. This allows deviations from the linear paradigm. We finally employ non-linear models from the GARCH family in a rolling framework to investigate the role of asymmetries. Contrary to a January return pattern in most markets, an April effect is found for Ghana. The evidence also shows the presence of the day of the week effects with asymmetric volatility performing better than the benchmark linear estimates. This seasonality though disappears when only the latest information is used (time-varying asymmetric GARCH). Our approach provides a new framework for investigating this well-known puzzle in finance.Calendar Anomalies, Non-Linearity, Market Efficiency, Asymmetric Volatility, Rolling windows.

Public Debts and Private Assets: Explaining Capital Flight from Sub-Saharan African Countries

We investigate the determinants of capital flight from 30 sub-Saharan African countries, including 24 countries classified as severely indebted low-income countries, for the period 1970-1996. The econometric analysis reveals that external borrowing is positively and significantly related to capital flight, suggesting that to a large extent capital flight is debt-fueled. We estimate that for every dollar of external borrowing in the region, roughly 80 cents flowed back as capital flight in the same year. Capital flight also exhibits a high degree of persistence in the sense that past capital flight is correlated with current and future capital flight. The growth rate differential between the African country and its OECD trading partners is negatively related to capital flight. We also explore the effects of several other factors - inflation, fiscal policy indicators, the interest rate differential, exchange rate appreciation, financial development, and indicators of the political environment and governance. We discuss the implications of the results for debt relief and for policies aimed at preventing capital flight and attracting private capital held abroad.capital flight; debt; sub-Saharan Africa; debt relief; capital control

Targeting Employment Expansion, Economic Growth and Development in Sub-Saharan Africa: Outlines of an Alternative Economic Programme for the Region

This paper outlines the elements of a development-targeted economic framework aimed at creating decent employment opportunities as a strategy for realizing core human development goals in Africa. Four policy areas form the core of the paper: monetary policy and inflation, exchange rate policy, development finance and financial sector reforms, and public investment and fiscal policy. This paper draws heavily on three large UNDP-sponsored studies of employment-oriented economic policies in Kenya, Ghana, and South Africa. The paper aims to discuss the elements of an alternative, development-targeted economic framework for African countries in general and, in doing so, the analysis draws on examples, research, and statistics from a wide range of countries.Africa, macroeconomics, employment, finance, exchange rates, inflation.