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ANALYSIS OF EFFECTS OF INTEREST RATE AND EXCHANGE RATE CHANGES ON STOCK MARKET RETURNS IN GHANA: A CASE STUDY OF GHANA STOCK EXCHANGE (2007-2015)

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 Format: MS WORD ::   Chapters: 1-5 ::   Pages: 70 ::   Attributes: Data Analysis,abstract, table of content, references ::   192 people found this useful

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ABSTRACT

This paper examines empirically the nature of the impact of the interest rate and exchange rate on Ghana stock market index. Stock market performance can act as the barometer of the economy as a whole. Prior to testing for co-integration, Augmented Dickey Fuller (ADF) unit root test is performed. The famous co-integration methodology is applied on monthly data of Ghana Stock Exchange All-share Index and the respective macroeconomic variables from January 2007 through December 2015 to determine the extent to which these macroeconomic variables influence the stock market returns. Johansen Juselius (JJ) co-integration test, Vector Error Correction Model (VECM) and Granger Causality test were applied to search for the long run and short-run impacts respectively.

The study establishes that a long-run equilibrium and causal relationship exists between the dependent variable; GSE All-share index and the independent variable under consideration namely, exchange rate. It was also determined that in the short-run, effects of interest rate and exchange rate volatility on Ghana Stock Exchange is nearly imaginary.

 The results provide some useful insights into the effects of interest rate and exchange rate on the stock market index in Ghana. Our findings can help the policy makers in decision on planning as well as investors in decision on portfolio investment

 

CHAPTER ONE

INTRODUCTION

1.1Background

The goal of this study is to examine the effects of interest rate and changes of exchange rate changes on stock market returns in Ghana. The performance of the stock market can reflect the overall performance of a country’s economy. Stock market index in a particular sector can reflect the performance of a particular sector. For example, when cocoa-related companies are making huge profits, the plantation index will tend to go up. A positively growing economy will be reflected by a stable stock market.

From the African Economic Outlook (2016), the Ghanaian economy grew at an average 3.7 percent, down from 4 percent in 2014. The real gross domestic product (GDP) was below 4 percent back in 2010, with a mere 3.4 percent, before rising to a high of 14.0 percent in 2011. The economic growth is expected to recover modestly to 5.8 percent in 2016 and 8.7 percent in 2017. The forecasted recovery in economic growth in 2016/2017 depends on fiscal consolidation measures remaining on track, quick resolution of the power crisis, two new oil wells coming on-stream and improved cocoa harvest and gold production (African Economic Outlook, 2016).

The stock market is a market that deals with the exchange of shares of publicly quoted companies, government, corporate and municipal bonds among other instruments for money. The establishment of a stock exchange in Ghana was recommended on the Pearl report by Commonwealth Development Finance company limited in 1969 (Gce.com.gh, 2017). Ghana Stock Exchange (GSE) was incorporated in 1989 as a private company limited and officially launched in 1991, and is now one of the most active markets in Africa. As a capital market institution, GSE plays an important role on the economic development in Ghana. It helps mobilize domestic savings thereby bringing about re-allocation of financial resources from dormant to active agents. Long-term investments are made liquid since securities can be transferred among participating public. The exchange has also enabled companies to engage local participation in their shares ownership, thereby giving the Ghanaian a chance to own shares of reputable companies.

Past empirical literature have indicated the financial variables and macroeconomic variables that influence stock market (Lane, 2002; Campbell, Polk and Voulteenaho (2010); Jansen and Moreira, 2004). Macroeconomic variables include GDP, interest rate, price level, balance of payments, exchange rate, fiscal balance, inflation and unemployment rate. Little evidence is available to conform the effects of some of these variables on the stock exchange market of Ghana. This is the motivation of this study, to conduct an analysis of the effect of interest rate and exchange rate on the stock market returns.

There are various factors that influence the performance of the stock market. These include economic growth, monetary policies, political issues, fiscal policies, exchange rates and international aspects. However, the stock price of a company include the company’s profitability, sales, balance sheet, new product launching among others. The interest rate and exchange rate were considered as determinants of performance of the stock market in this study.

The general knowledge for the correlation between interest rate and stock market returns is that interest rates and stock prices are negatively related. Higher interest rate due to strict monetary policy has consequences of negative effects on the stock market returns. This is so because higher interest rate reduces the value of equity as indicated by the dividend discount model and therefore, makes fixed income securities more attractive as an alternative to holding stocks. This affects the profit margin of firm as it raises the cost of doing business and reduce the prosperity of investors to borrow and invest in stocks. On the contrary, lower interest rates due to expansionary monetary policy also improve stock market.

A decline in interest rate can also lead to an increase in present value of future dividends. The correlation between exchange rate and stock market returns exist as a result of changes in foreign investments. The changing spot exchange rates facilitate the conversion of rates of return on foreign investment in stocks from one currency to another currency. When rates of return in an appreciating currency are translated into a depreciating currency, the adjusted rates of return increase and vice versa. Increasing foreign investments in a country’s stock market causes the local currency to appreciate with respect to related foreign currency by increasing the foreign currency inflows. Conversely, sales of a country’s stock by foreign investors cause foreign capital outflows. In turn, it makes local currency to depreciate against a related foreign currency, the depictions of such relationships between stock and foreign currency markets have likely flows of bidirectional causality. The expectation is that international fund managers will re-adjust their stock market investment decision when depreciation and uncertainty adversely affect stock returns.

1.2Problem Statement

This study tries to identify the short run and long run impact of interest rate and exchange rate on the Ghana Stock Exchange market index. The stock market index is used to measure how the economy of the country is performing. There are many factors that determine the stock market index’s performance, including monetary and exchange rate policies. For this study, the interest rate and exchange rate were chosen. Ghana being an export oriented economy, changes in exchange rate will stimulate the export and might have significant impact on the local investors as the foreign investors.

Exchange rate may have insignificant direct influence on the stock market performance but it nevertheless have positive or negative impact on the stock market index via other factors. Exchange rate depreciation allow us to sell more goods and services to other countries therefore enabling exports to exceed imports. As an export-oriented country, more exports can bring wealth and investment opportunities to Ghana. Investors will come and invest in the country and indirectly it will spur the stock market and the Ghanaian economy. Interest rate is expected to have negative impact on stock market index. Therefore decreasing the interest rate due to expansionary monetary policy may stimulate the stock market index because of increased economic activities.

A quick analysis of foreign exchange rate and interest rate history in Ghana shows some significant level of instability. Therefore, it would be interesting to explore the effect of its foreign exchange and interest rate changes on its stock market. Moreover, much work on the effect of the exchange rate and interest rate changes in the developing country like Ghana has not been done. The study is therefore intended to look at the effect of foreign exchange and interest rate changes on stock market returns in Ghana.

1.3Objectives

The main objective of the study is to examine the effects of interest rate and changes of exchange rate changes on stock market returns in Ghana.

1.3.1 Specific Objective

The specific objective of the study include;

  1. To examine whether stock market performance is influenced by interest rate and exchange rate in Ghana.
  2. To establish the type of relationship between exchange rate, interest rate and stock market index.
  3. To determine whether other macroeconomic variables affect stock market volatility in Ghana.

1.4Research Questions

The study seeks to find answers to the following questions:

  1. What is the impact of changing interest rate on the Ghana Stock Exchange market returns?
  2. What is the effect of changing exchange rates on the Ghana Stock Exchange market returns?
  3. Are investors affected by the volatility of exchange rate and interest rate?
  4. Should investors be concerned about other macroeconomic indicators?

1.5Significance of the Study

The findings of this study will assist the potential investors to better understand and analyze the changes resulting from interest rates and exchange rates fluctuations and there effects on stock market returns. It will also improve on the existing theory and knowledge on the changes that listed companies are going through in relation to interest rates and exchange rate fluctuations.

For the part of policymakers and regulators, the findings are expected to draw attention to them on the need to ensure strict adherence to policies that would promote improvement in the performance of the share index. The study will also enable the government and its agencies to be aware of the challenges facing the listed companies in stabilizing their performance.

The findings of the study will contribute to the knowledge and existing literature in the field under investigation and provide a base for further research for students and other researchers conducting similar studies in other related fields. This study will serve as a rich source of literature to other researchers, and the limitation of this study may be built on by others studying on the same topic. It is also hoped that the output of this research would confirm or refute the existing knowledge about the impact of interest rate and exchange rate on the stock market returns, especially on the Ghana Stock Market performance.

1.6Organization of the Study

 The study consists of five chapters as follows:

Chapter one comprises the background of the study, statement of the problem, objectives of the study, significance of the study, and the organization of the study.

Chapter two presents a review of the relevant literature on interest rate and exchange rate changes on stock market that will form the theoretical framework for the study.

Chapter three gives detail research methodology. It describes the sources of data, and empirical design.

Chapter four reports the empirical results. It covers data presentation, analysis and discussion. Here secondary data obtained using various means outlined in the methodology is organized into a meaningful data format, analyzed and discussed in order to draw conclusions.

Chapter five presents the findings from the data analysis and offers conclusions and recommendations.


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Paper Information

Format:ms word
Chapter:1-5
Pages:70
Attribute:Data Analysis,abstract, table of content, references
Price:₦3,000
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