Back
 JFRM  Vol.9 No.3 , September 2020
Effects of Monetary Policy on Stock Market Performance in Africa Evidence from Ten (10) African Countries from 1980 to 2019
Abstract: For a better insight and understanding of how monetary policy and the financial market in less developed countries such as those in Africa are interrelated; there is a need to also understand and appreciate the fundamentals of these economies and the associating imperfections within their financial systems due to the fact that they are less liberalized, relatively young, highly illiquid, logistically constrained among others. This study is a comprehensive analysis of the dynamics in stock market performance following changes in monetary aggregates in ten (10) selected African countries from 1993 to 2019. We adopted three stock market performance indicators; namely S & P global equity index, stock turnover and stock market capitalization as dependent variables and inflation, broad money growth, exchange rate, real interest rate and commercial bank and lender serving as independent variables. We then employed the random effect model based on our results from the Hausman test and VECM after co-integration was established among the variables. The study established the presence of a monetary transmission mechanism following changes in money supply. We found that growth in broad money positively affects the stock market performance through the interest rate channel. Interest rate and inflation recorded negative effects on stock market performance indices. We also found that changes in monetary policy are highly significant in stock market performance in the West African market due to the relatively high level financial openness in the countries under consideration.
Cite this paper: Asiedu, M. , Oppong, E. and Gulnabat, O. (2020) Effects of Monetary Policy on Stock Market Performance in Africa Evidence from Ten (10) African Countries from 1980 to 2019. Journal of Financial Risk Management, 9, 252-267. doi: 10.4236/jfrm.2020.93014.
References

[1]   Bernanke, B. S., & Blinder, A. (1992). The Federal Funds Rate and the Channels of Monetary Transmission. American Economic Review, 82, 901-921.

[2]   Bernanke, B. S., & Gertler, M. (1995). Inside the Black Box: The Credit Channel of Monetary Policy Transmission. Journal of Economic Perspectives, 9, 27-48.
https://doi.org/10.1257/jep.9.4.27

[3]   Bernanke, B. S., & Gertler, M. (2000). Monetary Policy and Asset Price Volatility. Working Paper 7559, Cambridge, MA: National Bureau of Economic Research.
https://doi.org/10.3386/w7559

[4]   Bjornland, H. C., & Leitemo, K. (2009). Identifying the Interdependence between US Monetary Policy and the Stock Market. Journal of Monetary Economics, 56, 275-282.
https://doi.org/10.1016/j.jmoneco.2008.12.001

[5]   Bordo, M. D., & Wheelock, D. C. (2004). Monetary Policy and Asset Prices: A Look Back at Past U.S. Stock Market Booms. Economic Research-Federal Reserve Bank of St. Louis, 86, 19-44.
https://doi.org/10.20955/r.86.19-44

[6]   Chami, R., Cosimano, T. F., & Fullenkamp, C. (1999). The Stock Market Channel of Monetary Policy. IMF Working Paper, Washington DC: International Monetary Fund, WP/99/22.
https://doi.org/10.5089/9781451843958.001

[7]   Chatziantoniou, I., Duffy, D., & Filis, G. (2013). Stock Market Response to Monetary and Fiscal Policy Shocks: Multicountry Evidence. Economic Modeling, 30, 754-769.
http://www.elsevier.com/locate/ecmod
https://doi.org/10.1016/j.econmod.2012.10.005


[8]   Coleman, A., & Agyire-Tettey, K. F. (2008). Impact of Microeconomic Indicators on Stock Exchange Performance: The Case of the Ghana Stock Exchange. Journal of Risk Finance, 9, 365-378.

[9]   Elbourne, A. (2008). The UK Housing Market and the Monetary Policy Transmission Mechanism: An SVAR Approach. Journal of Housing Economics, 17, 65-87.
https://doi.org/10.1016/j.jhe.2007.09.002

[10]   Fama, E., & Schwert, G. (1977). Asset Returns and Inflation. Journal of Financial Economics, 5, 115-146.

[11]   Friedman, M. (1956). The Quantity Theory of Money: A Restatement. Studies in the Quantity Theory of Money, 5, 3-31.

[12]   Friedman, M. (1988). Money and the Stock Market. Journal of Political Economy, 96, 221-245.
https://doi.org/10.1016/0304-405X(77)90014-9

[13]   Friedman, M., & Schwartz, A. J. (1963). Money and Business Cycles (in Part I: The State of Monetary Economics). The Review of Economics and Statistics, 45, 32-64.
https://doi.org/10.2307/1927148

[14]   Hogan, W. P., Sharpe, I. G., & Volker, P. A. (1982). Capital Market Efficiency and the Relationship between Equity Returns, Interest Rates, and Monetary Aggregates in Australia. Journal of Economics and Business, 34, 377-385.
https://doi.org/10.1016/0148-6195(82)90043-1

[15]   Ibrahim, M. H. (2003). Macroeconomic Forces and Capital Market Integration: A VAR Analysis for Malaysia. Journal of the Asian Pacific Economy, 8, 19-40.
https://doi.org/10.1080/1354786032000045228

[16]   Ioannidis, C., & Kontonikas, A. (2007). The Impact of Monetary Policy on Stock Prices. Journal of Policy Modeling, 30, 33-53.
https://doi.org/10.1016/j.jpolmod.2007.06.015

[17]   Laopodis, N. T. (2013). Monetary Policy and Stock Market Dynamics across Monetary Regimes. Journal of International Money and Finance, 33, 381-406.
www.elsevier.com/locate/jimf
https://doi.org/10.1016/j.jimonfin.2012.09.004


[18]   Mishkin, F. (2001). The Transmission Mechanism and the Role of Asset Prices in Monetary Policy, Working Paper 8617, Cambridge, MA: National Bureau of Economic Research.
https://doi.org/10.3386/w8617

[19]   Onyeiwu, C. (2012). Monetary Policy and Economic Growth of Nigeria. Journal of Economics and Sustainable Development, 3, 62-70.

[20]   Pierluigi, B. (1995). Stock Returns, Inflation, and the “Proxy Hypothesis”: A New Look at the Data. Economics Letters, 48, 47-53.
https://doi.org/10.1162/003355303321675473

[21]   Rigobon, R., & Sack, B. (2003). Measuring the Response of Monetary Policy to the Stock Market. Quarterly Journal of Economics, 118, 639-669.
https://doi.org/10.1162/003355303321675473

[22]   Suhaibu, I., Harvey, S. K., & Amidu, M. (2017). The Impact of Monetary Policy on Stock Market Performance: Evidence from Twelve (12) African Countries. Research in International Business and Finance, 42, 1372-1382.
https://doi.org/10.1016/j.ribaf.2017.07.075

[23]   Thorbecke, W. (1997). Stock Market Returns and Monetary Policy. Journal of Finance, 52, 635-654.
https://doi.org/10.1111/j.1540-6261.1997.tb04816.x

 
 
Top