An Econometric Analysis of the Impact of Macroeconomic Fundamentals on Stock Market Returns in Ghana

Relying on more recent data spanning September, 2000 to September, 2010, this paper investigates the effects of macroeconomic variables on stock market returns by employing the Johansen multivariate cointegration approach and vector error correction model (VECM). We present evidence of a long-run relationship between macroeconomic variables and stock returns. Our Granger causality test however could not establish causality from any direction between macroeconomic variables and stock prices and that earlier literature that found causality between the series may be misleading. Results from both the impulse response functions and variance decomposition show that among the macroeconomic variables, shocks to inflation, money supply and exchange rate do not only explain a significant proportion of the variance error of stock returns but their effects persist over a long period.