The Study of Causal Relationship between Stock Market Indices and Macroeconomic Variables in Cote d’Ivoire: Evidence from Error-Correction Models and Granger Causality Test

Abstract

This paper investigates the role of macroeconomic variables on stock prices movement in Cote d’Ivoire. Weutilize the stock price index (SPI) call BRVM10 to represent Cote d’Ivoire stock market and some relevantmacroeconomic variables such as industrial production index (IPI), consumer price index (CPI), domesticinterest rate (IR), real exchange rate (EXR) and real money supply (M2). We examine both long-run and short-rundynamic relationships between the stock market index and the economic variables with quarterly data coveringthe period of 1999:1 to 2007:4 using Johansen's multivariate cointegration test techniques. The study identifiedthat there is cointegration between macroeconomic variables and Stock prices in Cote d’Ivoire indicatinglong-run relationship. The results of Impulse Response Function (IRF) and Forecast Error VarianceDecomposition (FEVD) demonstrate that out of five macroeconomic variables selected, only consumer priceindex (CPI) and domestic interest rate (IR) are the key determinants of the stock price movements in Coted’Ivoire. The Granger-causality test based on the vector autoregressive (VAR) analytical framework wasemployed to empirically reveal that there is strong bi-directional relationship between stock price index (SPI) anddomestic interest rate (IR).Thus, changes in the domestic interest rate might be used to predict the future stockprice movement. The research also found that macroeconomic factors are not appropriate indicators to forecastthe future behavior of the stock index movements in Cote d’Ivoire.