An Econometric Analysis of the Impact of Macroeconomic Fundamentals on Stock Market Returns in Ghana

Abstract

Relying on more recent data spanning September, 2000 to September, 2010, this paper
investigates the effects of macroeconomic variables on stock market returns by employing the
Johansen multivariate cointegration approach and vector error correction model (VECM). We
present evidence of a long-run relationship between macroeconomic variables and stock
returns. Our Granger causality test however could not establish causality from any direction
between macroeconomic variables and stock prices and that earlier literature that found
causality between the series may be misleading. Results from both the impulse response
functions and variance decomposition show that among the macroeconomic variables, shocks
to inflation, money supply and exchange rate do not only explain a significant proportion of
the variance error of stock returns but their effects persist over a long period.