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.

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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Item Type: Ghanaian Topic  |  Size: 61 pages  |  Chapters: 1-5
Format: MS Word  |  Delivery: Within 30Mins.


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