Macroeconomic Variables and Stock Market Returns: Full Information Maximum Likelihood Estimation

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Research Journal of Finance and Accounting ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol 2, No 4, 2011

Macroeconomic Variables and Stock Market Returns: Full Information Maximum Likelihood Estimation John K. M. Kuwornu (Corresponding author) Department of Agricultural Economics and Agribusiness, P. O. Box LG 68, University of Ghana, Legon, Accra, Ghana Tel: +233 245 131 807 E-mail: / Owusu-Nantwi, Victor Ghana Institute of Management and Public Administration, P. O. Box AH 50, Achimota, Accra, Ghana Tel: + 233 245 131 807 E-mail: Abstract This study examines the relationship between macroeconomic variables and stock market returns using monthly data over period January 1992 to December, 2008. Macroeconomic variables used in this study are consumer price index (as a proxy for inflation), crude oil price, exchange rate and 91 day Treasury bill rate (as a proxy for interest rate). Full Information Maximum Likelihood Estimation procedure was used in establishing the relationship between macroeconomic variables and stock market returns in Ghana. The empirical results reveal that there is a significant relationship between stock market returns and three macroeconomic variables; consumer price index (inflation rate), exchange rate and Treasury bill rate seem to affect stock market returns. Consumer price index (Inflation rate) had a positive significant effect, while exchange rate and Treasury bill rate had negative significant influence on stock market returns. On the other hand, crude oil prices do not appear to have any significant effect on stock returns. The results may provide some insight to corporate managers, investors and policy makers. Key words: stock market returns, inflation rate, crude oil price, exchange rate, interest rate, Ghana 1. Introduction In recent years financial sector developments in emerging economies aimed at shifting their financial systems from one of bank-based to security market-based has orchestrated the establishment of many stock markets. Liberalizations and deregulations of markets for financial sector development to facilitate economic growth have also been encouraged by the drastic shift towards property-owning economies and the concomitant growing demand for access to capital. Interest in financial markets and the efforts to forecast their performance is connected to the growing recognition among academicians, financial analysts, and policy makers of the increasing impact of macroeconomic variables on these markets. However, the relationship between stock prices and fundamental economic activities in the less developed markets like Ghana has received little attention. The Ghanaian economy has over the last decade witnessed relative macroeconomic stability in terms of GDP growth, significant reduction of interest rates, and stability of the cedi/dollar exchange rate, crude oil price and inflation. This relative stability has been attributed to the growth of major sectors of the economy including the money markets (financial institutions) and the capital markets (debt and equity). The drop of interest rate following declines in inflation and prime rates has shifted the attention of investors to the stock market as the better means of investments. Evidence from the Ghana Stock Exchange (GSE) indicates that the relative stability of the interest rates and other macroeconomics variables have been the contributory factor to the growth of the stock markets. The attention of most investors has been shifted from investing in Treasury bills and other financial instruments which are risk free, as a result of the stability of the interest rate. This has caused the returns on these investments to fall. As a result of this, most investors have shifted their attention to the stock markets and so over the last decade stocks of some listed companies have been oversubscribed. Investing in stocks provides a higher return than the...
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