Macroeconomic Variables and Stock Market Returns: Full Information Maximum Likelihood Estimation

Abstract

This study examines the relationship between macroeconomic variables and stock market returns using monthly data over period January 1992 to December, 2008. Macroeconomic variables used in this study are consumer price index (as a proxy for inflation), crude oil price, exchange rate and 91 day Treasury bill rate (as a proxy for interest rate). Full Information Maximum Likelihood Estimation procedure was used in establishing the relationship between macroeconomic variables and stock market returns in Ghana. The empirical results reveal that there is a significant relationship between stock market returns and three macroeconomic variables; consumer price index (inflation rate), exchange rate and Treasury bill rate seem to affect stock market returns. Consumer price index (Inflation rate) had a positive significant effect, while exchange rate and Treasury bill rate had negative significant influence on stock market returns. On the other hand, crude oil prices do not appear to have any significant effect on stock returns. The results may provide some insight to corporate managers, investors and policy makers.

Key words: stock market returns, inflation rate, crude oil price, exchange rate, interest rate, Ghana