Stock market capitalization and economic growth in Ghana

Abstract

This study examines the relationship between stock market capitalization and economic growth in Ghana using quarterly time series data from 1991 to 2006. The study employed Johansen multivariate cointegration technique and vector error correction model to investigate the long-run relationship and the short-run dynamics among the variables. Also, the standard Granger-causality test was conducted to determine the causal relationship between the variables. The study finds that real economic growth, real stock market liquidity and real gross domestic investment have significant positive impact on the development of the Ghana Stock Exchange. Economic growth is the most important factor explaining the development of the Ghana Stock Exchange. In contrast, the results show that the banking sector development has a significant negative relationship with the stock market development suggesting that they are substitutes in financing corporate investments in Ghana. The results of the Granger-causality test indicate that economic growth leads to stock market capitalization (stock market development) without any feedback supporting “demand following” hypothesis. The study concludes that although the Ghana Stock Exchange is new, illiquid and highly concentrated, it has a great potential to mobilize both domestic savings and foreign capital for financing future investments. Therefore, there is the need for government to initiate policies to promote economic growth, stock market liquidity and domestic investment so as to develop the Ghana Stock Exchange.