Abstract
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.
Highlights
The creation of the Ghana Stock Exchange (GSE) was part of the recommendations of the economic reforms carried out in the 1980s to generate sustainable economic growth and development
Boateng [1] observes that, after many years of experiment with heavy state intervention in the economy, a consensus emerged that the achievement of a more dynamic economic growth required a greater role for the private sector and stock markets, since they are good levers for boosting private sector access to finance
Qiao [6] established the relationship between the stock prices of Tokyo, Hong Kong, and Singapore and exchnage rate. These results showed the existence of a long-run relation between exchange rate and stock prices for all three markets
Summary
The creation of the Ghana Stock Exchange (GSE) was part of the recommendations of the economic reforms carried out in the 1980s to generate sustainable economic growth and development. Boateng [1] observes that, after many years of experiment with heavy state intervention in the economy, a consensus emerged that the achievement of a more dynamic economic growth required a greater role for the private sector and stock markets, since they are good levers for boosting private sector access to finance. This invariably means that the growth and sustainability of the stock market are of relevance to the government, institutions, and individual investors. Changes in prices have been a visible characteristic of the Ghanaian economy, the nonconstant inflation rates
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