ABSTRACT
This research looks at the profound impact of certain
macroeconomic variables on the performance of the of Ghana Stock Exchange All
share index, and therefore use the outcome to predict how the GSE performance
would behave if there is a slight or greater change in the macroeconomic
variables. The popular co- integration method was employed for the methodology
and an annual data for both the GSE All share index and the five macroeconomic
variables namely, interest rate, inflation, money supply, real GDP, exchange
rate from 1990 to 2012 to ascertain how changes in the variables affect the GSE
performance. The research finally attains a level where there is a long run
equilibrium relationship existing between the dependent and independent
variables (GSE All share index and the five macroeconomic variables). Also it
was established that the effect of the macroeconomic variables on the Ghana
stock Exchange in the short run is almost imaginary. The results show that real
interest rate (RIR), Exchange rate (EXCH), Inflation rate (INF) and Real GDP
have a negative impact on Ghana Stock Exchange (GSE). Money supply (M2) is the
only variable that has a positive impact on Ghana Stock Exchange in the Short
run. Exchange rate (EXCH), Inflation rate (INF) and Real GDP are statistically
significant but the rest are insignificant. It therefore worthy to recommend
that prospective investors are very particular about the fluctuations in the
exchange rate and of course the interest rate. This is because these two
determine whether the economy is fertile to invest in or otherwise since their
changes has a repining or long run effect on the GSE.
CHAPTER ONE
INTRODUCTION
1.1 Background to the study
There are a lot of programs and policies that have been
implemented by various governments in Ghana so as to achieve a more
constructive macroeconomic background to help boost private investment. An
example is the emergence of the Ghana Stock Exchange market which lay on the
drawing board in the late 1980’s. The issue of concern is the scientific proof
of an association existing between the macroeconomic variables and the ‘all
share index’ that will give investors the assurance to invest especially on the
stock market.
The plan of instituting a stock market in Ghana came to being
about 27 years ago. This idea of establishing a stock market moved to an
advanced stage in the year 1989 and virtually began smooth operation in the
year 1990. The then Governor, Dr. G.K. Agama was to be the head of the ten
member committee to monitor the operation of the Exchange. The committee’s sole
duty was to fuse the already existing works with new ones which would be
brought on board towards the actualization of a stock market in Ghana. the
stock Exchange started as a limited private company, and operated under the
companies code 1963, but subsequently expanded in 1990 to trade freely in
October 1990 in accordance with the Stock Exchange act of 1971 ( i.e Act 384).
Stock business commenced on that same day, after the launch of the Exchange
Market in 1990. However, the Exchange Market became a public limited company in
April, 1994 (BOG working paper 2003).
The GSE is a scheme devoid of government interference;
therefore no funds are solicited from the government. (Victor 2003). No
shareholders belong to the Exchange except that there are two groups of
participants namely, Licensed Dealing Members and Associate Members. A Licensed
Dealing Members are the organizations who have the right to buy or sell a
security which has been listed. On the other hand a member who is an associate
is a person or an organization which has been approved membership status but is
not permitted to act as stock broker. By the close of 1998 participants of the
Exchange had moved from three to fifty three. Also it started business with
three brokerage entities and eleven listed companies.
In defining a capital market, it can be said to include
market for debt or equity in which business enterprises, including companies
and governments can raise long-term funds. It is very essential for economic
growth just as the money market does. The market is seen to perform crucial
roles in the workings of the economy.
The Ghana stock Exchange right from its beginning has seen
several processes of growth and development. In view of that, the exchange
market is viewed as one of the highest accomplishing markets in the African
region (BOG working paper 2003).
Currently, the GSE has 37 listed companies operating in the
market featuring one depository and preference shares each. The government
however is holding on to certain organization which could be allowed to be
enlisted on the stock exchange. It is so surprising to say that a lot of banks
are moving away from the capital market for no proper reason.
Once the government starts patronizing the market, most other
companies will be motivated to invest in it which will eventually make the
market a bullish one. Moreover, failure on the part of some companies which
produce oil to enlarge their mode of operation and use the market as a means of
raising long term capital for progress and growth in their business.
As Boateng (2004) observes, the stock market helps to mop up all
savings and funds from the economy and ensure that they are put into proper
investments ventures in the economy. Through mobilization of ideal resources it
generates savings; the mobilized savings are made available to various segments
such as agriculture, industry, manufacturing among others. This is how capital
is formed by through the net addition to the existing stock of capital in the
economy. This helps in increasing capital formation (Thorbecke, 1997).
Capital market helps to secure longer term financial assets
for a specified time period. Thus it provides an investment avenue for people
who wish to invest resources for a long period of time. It therefore gives
investors deserving interest rates as return to enable them to invest.
Instruments which provide investment avenues for the public include: insurance
policies, bonds, equities, units of mutual funds etc.
Production and productivity in the national economy is
enhanced through the use of this system (Smirlock and Yawitz, 1985). It helps
in research and development. It enables production and productivity in the
economy to increase through the creation of employment and improvement in
infrastructure. Although capital markets helps in mobilizing funds, it also ensures appropriate apportionment
of these resources. It can have regulation over the resources so that it can
direct funds in a qualitative manner.
Capital market offers various types of facilities including
long-term and medium term loans to industry, consultancy services, export
finance, underwriting services among others. The manufacturing sector is
assisted in a large spectrum through these services.
According to Kibuthu (2005), the Capital market is a place
where the investment possibility is continuously available for long term
investment. It makes funds available on continuous basis, which makes it a
liquid market. Capital market transactions are linked to the stock exchange
market; as such both buyers and sellers can always buy and sell their
securities as long they are ever available. Thus marketability in the capital
market becomes easy.
In countries like Ghana, where there is lack of an advance
and strong capital market, financial resources are under underutilized.
Potential investors with ready cash prefer to buy hard currencies such as the
dollar and even put them under their pillows. The reverse is true for the
developed capital markets as they also provide access to foreign cash for
indigenous industries. The capital market definitely is a major player in the
development of any economy.
According to literature available from Lane (2002), Campbell
and Yogo (2003), Jansen and Moreira (2004), Donaldson and Maddaloni (2005),
there are other macroeconomic factors influencing the stock market performance
aside from those mentioned earlier. They include; Inflation, interest rates,
GDP, exchange rate, and money supply. Little research has been done in Ghana to examine the direct effects of some
of the above variables on the stock exchange performance. Interest has so far
been on the dynamic effects of changes in the above mentioned variables on the
general stock market performance in the case of Ghana.
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