Stock prices and macroeconomic information in Ghana: speed of adjustment and bi-causality analysis

Abstract

PurposeThe purpose of the paper is to investigate the causal relationships and speed of adjustment of stock prices to changes in macroeconomic information (MEI) in Ghana from 1996 to 2018 using monthly data. The paper seeks to conduct the investigation at individual MEI level rather than the composite MEI.Design/methodology/approachQuantitative approach was used in this paper. Monthly data span of 1996–2018 was used. The delay and half-life technique was used to determine the speed with which the information resulting from the changes in the macroeconomic are evident in the stock price. Thereafter, Toda–Yamamoto Granger no-causality approach was used to examine the causal relationship amongst variables.FindingsThe paper revealed that although the market adjustment to MEI has improved, the speed is till slow. The exchange rate exhibited the slowest speed in respect of the market reaction while the market reaction to money supply was the fastest. Toda–Yamamoto Granger no-causality estimation also revealed a bi-directional causality between MEI (gross domestic product, interest rate and money supply) and stock price and uni-directional relationship flowing from MEI (the exchange rate and foreign direct investment) to stock price. The paper also found no causality between inflation and stock price.Research limitations/implicationsThe findings although revealed improved level of market efficiency in comparison with the earlier data, the speed of adjustment is still undesirable. Rigorous approach should be adopted for the implementation of major reforms such as alternative market so as to increase the number of share listing and to increase the scope of investors' participation to enhancing trading volume and marketability and ultimately speed up information diffusion.Practical implicationsThe practical implication of the low level of information processing rate of Ghana Stock Exchange (averagely more than a month) is that astute investors and market analysts could employ MEI to outperform the market prior to their infusion onto the stock market.Originality/valueThis study is one of the few studies in the Ghanaian literature that has extended the investigation of the speed of adjustment beyond composite or aggregate macroeconomic level estimation to estimation at individual variable level. This contribution is very relevant since each macroeconomic variable has unique characteristics and require specific policy framework, it is important to consider the speed of adjustment from the perspective of each of the individual variables.

What can we learn about the market reaction to macroeconomic surprise? Evidence from the COVID-19 crisis

“…Evidence suggests that the impact of macroeconomic events on index futures trading is not always equal. Queku et al [53] use Toda, Yamamoto, and Granger's no-causality method and monthly time series data from 1996 to 2018 to investigate the causal linkages between share prices and variations in macroeconomic indicators (MEI) in Ghana. They indicate bidirectional causation between MEI (GDP, interest rate, and money supply) and share prices and a linear link flowing from MEI (currency rate and overseas direct investment) to share prices.…”

“…Several studies examine the relationships between macroeconomic variables and stock prices ( 18 , 33 , 55 , 7 ; Chang et al, 2020; 34 , 51 ). Other studies investigate the effect of macroeconomic news on financial stock markets ( 1 , 15 , 16 , 17 , 19 , 2 , 25 , 54 , 9 ; Corbet et al, 2020; 35 , 53 , 63 ). Besides, two recently developed real-time, real-activity indexes describe and measure the changes in macroeconomic news surprises and uncertainty.…”

COVID-19 Impact on Major Stock Markets

“…As observed by Morales and Callaghan (2012), worldwide stock markets are becoming more interdependent, and hence, crisis happening in one country spreads faster in other countries. Queku et al (2020) also observed that market adjustment to macroeconomic indicators has improved; however, the speed of recovery has been very slow.…”

The Relationship between Money Supply, Exchange Rates and Oil Prices with KLCI's Price

“…Additionally, the stock market is critical to a country's economy, and its interconnected movements are a leading indicator of economic crises such as recessions and depressions (Queku et al, 2020). According to Moussa and Delhoumi (2021), stock markets mediate between listed firms and investors in developed and emerging markets.…”

“…Malaysia's index has Southeast Asia's second-largest domestic market capitalization. A strong stock market suggests a healthy economy, but a long-term drop in the stock market signals economic difficulties such as recession or depression (Queku et al, 2020). According to Liang et al (2020), uncertainty in the United States has a negative effect on stock prices in eight markets.…”