Abstract:
This study empirically examines the relationship between stock market performance and economic growth in Ghana using quarterly time series data from 1991 to 2012 for four stock market performance indicators, namely; stock market capitalization ratio, stock market turnover ratio, total value traded ratio and the Ghana Stock Exchange market index with three other control variables. The study employed the Johansen and Juselius (1990) multivariate cointegration technique and vector error correction model to investigate the long and short-run relationships amongst the variables. The standard Granger causality test is performed to establish the direction of causality. The impulse response functions (IRFs) and forecast error variance decomposition (FEVD) are used to assess shocks and the relative importance of each variable in the system. The results indicate a positive and significant relationship between stock market performance and economic growth. The Granger causality results suggest a unidirectional causality in general from stock market performance to economic growth. This substantiates the supply leading finance hypothesis. The IRFs and the FEVD results reinforce the positive link between stock market performance and economic growth. The study concludes that to tap into the growth enhancing capacity of the Ghana Stock Exchange, the government should initiate policies to promote the supply (tax incentives to companies to list on the GSE) of and demand (using the GSE as a source of finance for all government projects) of securities. This would ensure continuous and sustained economic growth in Ghana.
