Investigating the Effect of Inflation Rate and Interest Rate on Stock Performance in Ghana (2008-2017)

Abstract

The performance of the stock market has been empirically established as an important element for economic growth. In Ghana variations in macroeconomic indicators affect the performance of stocks. Moreover the mechanisms have not been widely studied. The study seeks to address whether macroeconomic indicators have significant influence on the stock market returns within the specified period. The study in using the stock returns as a proxy for the stock performance seeks to use causal research design to examine the effect of inflation rate and the interest rate on stock performance between the period 2008 and 2017. Within this time frame, in plotting the graph at the preliminary stages to establish the relationships between the proxy and the other two main variables (interest and inflation rates) annual data was used as a result of the minute changes in the monthly data but in running the regression monthly data was used in order to have enough data points. This study used time series data and secondary data from the world development indicators of the World Bank. A dynamic OLS regression technique was employed in analysing the data. The study established that, interest rate have a positive and statistically significant effect on stock performance. Per the results, a negative and statistically significant effect of inflation on stock performance is observed. Again, a positive effect of GDP on stock performance which is also statistically insignificant was established. Furthermore, exchange rate exhibited a positive and statistically significant effect on stock performance. The study therefore recommends that, the Central Bank must strive to maintain the interest rate, exchange rate and inflation rate at low levels to improve stock performance. High inflation rates erode investments especially real interest rates. The outcome of the study concluded that, within the ten year period, interest rate and stock performance had a positive relationship whiles inflation rate and stock performance had a negative relationship.