Dynamic Effects of Inflation and Interest Rate Risks on Stock Market Returns in Ghana: Exploring non-linearities

Abstract

This study examines the dynamic impact of inflation and interest rate volatilities on stock market returns in Ghana. In both the constructed base linear and extended non-linear models, market returns have negatively autoregressive in the short-run. Also, interest rate risk has a slight direct effect in the base linear model in the same time period. However, at equilibrium for the said model, both risks influence returns. For the non-linear model, only interest rate volatility and the interaction between the two risks affect market returns in the long run. Possibly, market inefficiency inhibits explanatory power of the non-linear model.

Keywords: error correction analysis, inflation volatility, interest rate risk, stock market returns

JEL classification: C32, C57, E43, G32.