Dynamic Connectedness between Indicators of the Ghana Stock Exchange Returns and Macroeconomic Fundamentals

Abstract

The performance of the Ghana Stock Exchange (GSE) over the years has been susceptible to both crises and country-specific factors reflected in its macroeconomic fundamentals. Accordingly, the GSE composite index (GSECI) has experienced rapid fluctuations across time, coupled with a declining market capitalisation from a reduction in the number of existing firms. The plunge in the number of firms is partly linked to the banking sector clean-up in 2017, which induced the collapse and consolidation of some financial institutions as well as weaknesses in other macroeconomic variables. This ignites an investigation into whether the synergistic impact of listed firms that represent the financial sector and the soundness of the banking sector measures are dominant factors that could drive or respond to shocks. Hence, the study investigates the lead-lag relationships and degree of integration among two indicators of the GSE—GSECI and GSE financial index (GSEFI), seven banking financial soundness indicators and eight interest rate measures. The wavelet approaches (biwavelet and wavelet multiple) are utilised to address the research problem. The DCC-GARCH connectedness approach is then employed as a robustness check. We found high interconnectedness between the indicators of the GSE and banking sector financial soundness, relative to the interest rates. Notwithstanding, the Treasury bill measures drive the GSE indicators in the short-, and medium-terms. In comparison with the two indicators of the GSE, significant comovements are dominant between the GSEFI and the two forms of selected macroeconomic variables. We advocate that the comovements among the indicators of the GSE, banking sector financial soundness and interest rate measures are heterogeneous and adaptive, especially during crises, but more significant comovements are germane to the GSEFI. The study provides further implications for policy, practice, and theory.