Interelationship between stock price index and macroeconomic variables: Case of Ghana

Abstract

The study sought to investigate the interrelationship between stock price index and macroeconomic variables taking Ghana as a case using the cointegration, vector error correction (VEC) and vector auto regression (VAR) approaches. Annual data covering the period 1991-2006 on real GDP, All-shares index, consumption, investment and consumption shares of real GDP was collected, interpolated into quarterly series for the analysis and used for the study. The outcome of the study showed that the real GDP is determined by consumption, investment and government activities. The index is influenced by changes in the real GDP, government activities and lags of the index itself. Investment is determined by the All-shares index and changes in consumption are accounted for by changes in government activities, the market index and lags of consumption. Bidirectional causality was found between the index and investment and a unidirectional causality was found between the index and activities of the real sector. The cointegration between the market index and the macroeconomic variables suggests that for a better market performance which has the tendency of increasing investor confidence in the capital market and investment, government should put measures in place that seek to ensure a stable macroeconomy.