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Analysis of the Effect of Interest Rate on Stock Prices: A Case Study of Ghana
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International Journal of Economics, Finance and Management
Sciences
2019; X(X): XX-XX
http://www.sciencepublishinggroup.com/j/ijefm
doi: 10.11648/j.XXXX.2019XXXX.XX
ISSN: 2326-9553 (Print); ISSN: 2326-9561 (Online)

Analysis of the Effect of Interest Rate on Stock Prices: A Case Study of Ghana Stock Exchange

Emmanuel Teitey

Graduate School of Business, Kings University College, Accra,Ghana

Email address:

teitey2000@gmail.com, eminet1972@hotmail.com

Abstract
One importance of the Ghana stock exchange is that it assists investors or shareholders in boosting
impressive financial results. For instance, five-year performance from 2009 to 2013 showed steady
growth in profit and returns on investments of Banks listed at the Ghana stock exchange. Steady growth
was possible due to the negative relationship that existed between interest rates and stock prices within
the period (2009-2013). This research used quantitative methodology and was performed using regression
analyses to assess the relationship between interest rates and stock prices on the Ghana stock exchange.
The ordinary least square regression was estimated with stock price as the dependent variable and interest
rate as the independent variable. The variables were transformed into their natural logarithm forms. The
result obtained was: LNS = 8.6835 – 1.4756LNI + e, which mean a negative relationship exists between
interest rates and stock prices. A unit or percentage increase in interest rates would lead to a decrease in
stock prices by approximately 1.48%, while a unit or percentage decrease in interest rates would lead to
an appreciation in stock prices by 1.48 %. This relationship could be explained by the influence of when
interest rates rise, people prefer to invest in the treasury market and other fixed income markets, thereby
moving funds away from the stock market; and the fall in demand for stocks will push stock prices
downward. The opposite is true for a fall in interest rates.

Key words: stock prices, interest rate, stock market, fluctuation, regression
1. Overview
Most studies suggest that macroeconomic environment has an important effect on stock market
returns [2,13,18]. Maintaining macroeconomic stability has been one of the main challenges for
developing countries. The relationship between stock market returns and interest rates has been examined
by researchers as it plays an important role in influencing a country`s economic development [13].
Interest rates are determined by the monetary policy of a country according to its economic situation.
Changes in interest rates influences the value of a company`s stock and shares and, thus, the stock returns.
Interest rates are one of the important macroeconomic variables, which are directly related to economic
growth. Generally, an interest rate is considered as the cost of capital, which means the price paid for the
use of money for a period of time. From the point of view of a borrower, the interest rate is the cost of
borrowing money or “borrowing rate” [5].
The rationale for the relationship between interest rates and stock market returns is that stock
prices and interest rates are said to be negatively correlated [23]. Higher interest rates, resulting from
contraction monetary policy, usually negatively affects stock market returns because higher interest rates
reduce the value of equity and makes fixed income securities more attractive as an alternative to holding
stocks. This will reduce the tendency of investors to borrow and invest in stocks and raise the cost of
doing business, hence, affecting the profit margin. On the contrary, lower interest rates result from an
expansionary monetary policy boost stock market [12].
A study [1] found “the relationship between stock prices and interest rates to be negative and
statistically significant on the Ghana stock market” (p.13). This research used single economic variable
(borrowing rate), which has not been adequately researched in Ghana, while [1] applied quadruple
economic variable (inflation, rube oil prices, exchange rate, and interest rate; and each variable was
analysed individually). Also, this research is apposite due to institutional, developmental, and
technological changes over time so any research reflecting current issues is appropriate.
2.Research Design
The major research questions that guided this analysis study were: (R1) did changes in interest rate relates
to stock prices of the Ghana stock exchange. (R2) Is there a relationship between this is a quantitative
research using a positivistic approach and analytical survey. The sampling technique was stratified, and
purposive sampling approach employed.

Hypotheses were formulated based on the research question:

(R1)Ho: Interest rates did not relate to stock prices.
H1: Interest rates relates to stock prices.
(R2)Ho: There is no relationship between interest and stock prices.
H1: There is a relationship between interest rate and stock prices.
These hypotheses were tested to assess the significance of the regression analysis. The study failed
to accept null hypotheses because the probability value was greater than 1% and 5% critical value
at a significant level that means relationship exist between interest rate and stock prices.
2.1. Population and Sampling Strategy
The sampling technique was stratified, and purposive sampling approach was employed. The
population size for the research was five years (2009-2013) of interest rate computation of the
Bank of Ghana and the World Bank, as well as five years (2009-2013) of stock prices computation
of the Ghana Stock Exchange Market report and stock literatures. Relationship between interest
rates and stock prices was analysed using the following method:
 3

First, the study used ordinary least square (OLS) regressions by analyzing explanatory variables
with each response variable as the stock prices. Second, the study used unit root test, which was
used to analyze all explanatory variables and their response variables that were applicable in the
study, since these variables are time series in nature. Therefore, the study performed DF Unit
Root Tests to decide whether those time series were stationary or non-stationary.
Third, autocorrelation is one of the most important assumptions made in regression analysis. If the
successive residuals are correlated there is a condition of autocorrelation for time series data.
Durbin-Watson statistic (d) is applied to check whether there is an autocorrelation problem for the
sample data set. Fourth, this study also performed the test for multicollinearity to examine
whether the explanatory variables are correlated which ensures the validity of multiple regression
models in predicting stock prices [22]. And finally, the study performed a Causality test to
determine whether changes in the short-term and long-term interest rates (average interest rates)
cause changes in stock prices [22].
2.2. Research Data
The researcher used secondary data because with quantitative studies secondary data like time
series data gives accurate measurement while with primary data like, interviews and
questionnaires does not give precise measurement. Reading of documents in the form of literature
review is also a research instrument so there is an instrument.
The research employed secondary sources as the main data collection method. These secondary
data sources were analyzed and literature on interest rate and stock prices were used. Data was
collected from secondary sources, such as the Bank of Ghana, official database of the World
Bank, the Market Report of the Ghana Stock Exchange, and other literature. These data sources
provided pertinent information on stock prices and were used to analyze the interest rate and stock
prices of the Ghana stock exchange [9,10,11,18,21].
2.3. Data Collection Procedures
This research focused mainly on secondary types of data. All secondary data on interest rate was
collected from the Bank of Ghana and official database of the World Bank while data on stock
prices were also collected from the market report of the Ghana stock exchange and other stock
literature reviews.
The data collection was mainly from the Ghana stock exchange and the Bank of Ghana. The
amount of secondary data at the disposal of this research is quite considerable. This has been
obtained from internal and external sources. The internal sources of data are obtainable from the
Bank of Ghana and the Ghana stock exchange while the external source was the official database
of the World Bank.
2.4. Data Aanalysis
The research used quantitative data analysis methods. Trend analysis was applied based on the
period 2009-2013. This period was chosen because interest rate fluctuations within the last
decades cannot be comprehended. The study performed five years performance evaluation
analysis based on the data gathered or the time series data. The research relied on four broad
indicators of performance which include: (a) Increase in interest rate, (b) Decrease in interest rate,
(c) Increase in stock prices; (d) Decrease in stock prices since the two variables have an inverse
relationship, and the information was analysed using SPSS and Stata.

3.Literature Review
Many research studies investigated how the performance of the stock market is affected by certain macro-
economic variables [1,3,24]. Many were interested in variables that may affect the stock market due to the
importance of stock market itself as it assesses the economic condition of that particular country. This is
particularly important to an emerging stock market, because as it affects how the country implements its
strategies in order to accelerate economic growth [1,3,24].
Interest rates are one of the most important macroeconomic variables that can be used to explain
economic growth and how efficient stock markets are [17]. Interest rates often are known to be the cost of
capital; the price paid for the use of money for a period [17]. The relationship between interest rates and
stock return is said to be a negative relation. Interest rate levels, as well as their volatilities, affect the return
distribution of the financial sector based on empirical evidence [17]. [17] also stated that there are other
researchers who suggest that there is no relationship between the stock return and interest rate in the long
term. Some studies concluded that the relationship was positive, while others disagreed [1,3,24].
According to the [25], the Bank of Ghana in January 2015 issued a government of Ghana calendar
for securities for the year 2015 from January 1st to June 30th, showing the amount and types of securities the
government intended to borrow from the public. The Government intended to borrow within this period an
amount of GH¢25,420.00m. The Central Bank envisaged to issue at least GH¢880.00 million of Treasury
Bills and Notes weekly at all times to support government liquidity requirements, which includes the
redemption/rollover of maturing securities for the week with a policy rate at 19%, and interbank rate at
23.70%, as of December, 2014. With inflation rates as of December 2014 the same year standing at 17%
and the government`s insatiable demand for public funds in 2015, (99.81% increase in the amount of
securities to be issued in 2015), one can conclude that interest rates on short term securities (91-Day
Treasury Bills - 2-Year Notes) would soar. The expectation is that interest rates on a 91-Day Treasury Bill
at the end of June would raise, reaching an average of 28%. This translates, therefore, into higher interest
rates to be offered to customers of banks who ask for credit; hence, low prices of stocks and shares at the
Ghana stock exchange [25].
Interest rates have a strong relationship with stock volatility as can be seen by how it changes on the
sector and composite return and volatility as in Istanbul Stock Exchange, where these variables are
considered the possible proxy for the rate of daily information arrivals. Index returns decrease in response to
changes in interest rates; the only service sector return reacts negatively and significantly to the exchange
rate changes. Interest and exchange rate significantly affect indices in ISE. In particular, the market
volatility is more sensitive to changes in interest rates [17].
Furthermore, the negative relationship between stock market and interest rates can be explained by
the Japan stock market. [14] found that the insignificant relationship between stock prices and interest rate is
due to the fact that Japan has applied unprecedented monetary easing to reduce interest. Therefore, interest
rates will reduce the impact on stock price. On the other hand, [8] stated “there is a positive impact on stock
market.”. This theory can be proven by stock market capitalization. When the interest rate is high, the stock
market capitalization will increase. Thus, economic growth and development is retarded. Government
controls the interest rate to help the growth of the stock market. [1] also agreed that there is a negative
relationship between real long-term interest rate and stock market movement in Ghana by employing vector
error correction model. This is because in the late 90`s, there was high Treasury Bill rate and investors
would invest in treasury bills because it is more profitable than stock market. This has decelerated the
performance of the Ghana stock market.
Interest rate, exchange rate, and inflation have some influence on the performance of stock market.
[7] described the relationship of output, stock market and interest rates. Blanchard states that “higher stock
money lowers interest rate which means lower cost of capital and in turn causes better stock market value”
(p. 133). Blanchard observed that a change in the policy would cause a change in the stock market because
of real interest rate and anticipated profits. The announcement of a policy leads to change in profits and
discount rates which in turn affect the performance of stock market. [7] then concluded that the flexible
policies affect the nominal money which leads to change in the stock market [7]. This is possible and
pertained to current issue because any favorable information at the market, the market responds positively to
it.
 5

A number of studies were conducted to find the relationship between macroeconomic variable and
stock prices but a few studies focused on sector-wise relationship [23]. One study of [23] investigated the
effects of exchange rate, interest rate, and their volatilities on stock prices of the banking industry of
Pakistan. Co-integrated results suggest the existence of significant negative long-term relationship between
exchange rate and short-term interest rate with stock prices [23]. However, positive and significant
relationships exist between volatilities of exchange rate and interest rate with stock prices. Causality
analysis confirms bidirectional causality between exchange and stock prices. Whereas unidirectional
causality tested between the short-term interest rate and stock prices, sensitivity analysis confirms that the
results are robust. These results suggest that investors should invest in fixed income securities market when
exchange and interest rates are highly volatile. This situation normally happens with the market speculators
who are ready to do anything when price volatilities occur. The results also support the view that exchange
rate and interest rate can be used as indicators for investment decision making in the fixed income securities
market [23].
Interest rates will affect a stable stock market as an important factor in a country`s strategy to
facilitate the flow of investment in the stock market in order to accelerate economic growth. [23]
investigated the impacts of interest rate volatility on stock market returns and they concluded that interest
rate has a significant negative relationship with the stock market. An increase in interest rates generally
results in people tending to keep their savings in the banks so that they get high interest rather than investing
in the risky stock market. Besides, higher interest rates also reduce the profitability of firms and hence a
decline in stock prices. As interest rates decrease, investors switch their money from banks and invest in the
stock market. Consequently, stock market performance increases as a result of a decrease in interest rate and
this in turn reduces the probability of financial distress. Thus, interest rates have a significant negative
relationship with stock market performance [23].
[19] stated there is an inverse relationship among stock returns, expected inflation and positive
relationship between stock returns and real activity. [19] tested the hypothesis of the negative relationship
by selecting data from 1926 to 1940. [19] was considering changes in the monetary policy regime. Most of
the time, these periods were normally experienced high inflation and high interest rate regimes and the
behaviour of economic variables could be clearly seen or identified during this era. Kaul observed that this
inverse relationship can be explained by understanding the equilibrium process in the monetary sector
depending on money demand and supply influence. Empirical tests showed the sensitivity of bank stock
returns of the market against interest rates and exchange rate risks, they covered stocks of 48 US banks for
the period 1975 to 1987, and the results proved that exchange rates had a significant negative relation to US
banks stock returns [19].
4.Research Problem
The problem that this study explored was interest rate fluctuation in Ghana and its influence on
stock prices of the Ghana stock exchange. This represents a research problem because interest rates are
regulated by the activities of the government and the central bank. Government serves as a borrower of
funds from the general public through issuing of short-term instruments (Treasury Bills). When Treasury
Bills are issued, interest rates rise and vice versa. This study, therefore, sought to discover the reactions of
stock prices at the Ghana stock exchange when interest rates rise, thus, compelling the government to
clean up the excess fund in the system by purchasing back short-term instruments through the Central
Bank. This study was appropriate because there are lots of conflicting results from the various researchers
[4,8,13]. Some say there is negative relationship, others say they see a positive relationship, whiles
another group observes no relationship at all [4,8,13]. Also, it has been long since these studoes were
conducted, hence, a new research is appropriate for the reflection of current issues.
This study also contributes to the existing academic body of knowledge and derivative literature
as it brings new evidence from the analysis of interest rate and its effect on the stock prices of the
Ghanaian stock market. In 2006, for example, foreign equity accounted for 75.3% of the equity finance
recording in Ghana compared to 29.9% in 2001 according to a Ghana Investment Promotion Centre`s
quarterly report [16].
According to the [25] the Bank of Ghana in January 2015 issued a government of Ghana calendar
for securities for the year 2015 from January 1st to June 30th showing the amount and types of securities
the government intended to borrow from the public. The Government intended to borrow within this
period an amount of GH¢25,420.00m. The Central Bank envisaged to issue at least GH¢880.00 million of
Treasury Bills and Notes weekly at all times to support government liquidity requirements, which
includes the redemption/rollover of maturing securities for the week with a policy rate at 19%, and
interbank rate at 23.70%, as of December, 2014. With inflation rates as of December 2014 the same year
standing at 17% and the government`s insatiable demand for public funds in 2015, (99.81% increase in
the amount of securities to be issued in 2015), one can conclude that interest rates on short term securities
(91-Day Treasury Bills - 2-Year Notes) would soar. The expectation is that interest rates on a 91-Day
Treasury Bill at the end of June would raise, reaching an average of 28%. This translates, therefore, into
higher interest rates to be offered to customers of banks who ask for credit; hence, low prices of stocks
and shares at the Ghana stock exchange [25].
5.Main Findings of the Research
The chapter presented solutions to the research questions and developed the theoretical foundation
through literature search, and methodology of the research used in this study. This section presents
findings and results of the research including hypotheses and detailed statistical analysis.
5.1. Unit Root Tests
The second research question concentrated on the correlation of interest rate and stock prices were
analysed using Dicky-fuller Unit Root test, the hypothesis proves statistically positive with P-value > 05
level of significant which indicated we accept null hypothesis and we do not reject it. Thus, the null
hypothesis that states interest rates have a unit root, and concludes that the interest rate variable is
stationary at level 1 is rejected. Similarly, stock prices also proved to be stationary at level 1. A p-value
of 0.9394 led to the rejection of null hypothesis that stock price has a unit root. In the research conducted
by [24], the stock market prices in Ghana were reported to be affected by macroeconomic variables of the
economy with respect to their intensity in different markets. An investor, therefore, needs to be aware of
the behaviour of the stock market with the results which are generated after the fluctuation of these key
variables [24].
5.2. Least Squares Regression
The first research question concentrated on the co-efficient correlation or relationship between the
interest rate and stock prices were analysis using ordinary least square regression, the hypothesis shown
negative correlation or relationship that is -1.48% at 5% level of significant means a unit or percentage
increase in interest rate would lead to a fall in stock prices by approximate while a unit or percentage
decrease in interest rate would lead to an appreciation in stock prices by-1.48%. The results confirm the
literature reviewed and research conducted by [6]. In their research, they included US, UK, and Japan
stock markets operation, the relationship between macroeconomic variables and the fluctuation of stock
prices. The finding of these studies shows that with the minor variation, macroeconomic variables have
significant impact on the stock prices.
5.3. Test of Autocorrelation
The second research question concentrated on the interest rate and stock prices relationship were
analysed using the autocorrelation statistical test using the Durbin Watson test. The hypothesis proves
statistical significantly negative with the DW value of 0.83 > 05 % Significant level which means that we
fail to accept null hypothesis and thus reject it and conclude that there is absence of autocorrelation in the
data. The statistical test used is the Durbin Watson test with the hypothesis: Ho: p = 0. There is no
positive or negative autocorrelation. Ha: p ≠ 0: there is no positive or negative autocorrelation. The
findings from this research have provided evidence for the theoretical literature reviewed. This was
 7

possible because in the research by [14], found that there was a negative relationship between stock
returns and both long-term and short-term interest rate.

5.4. Test of Causality

. The first research questions concentrated on the co-efficient correlation or relationship between interest
rate and stock prices of the Ghana stock exchange were analysed using the causality test. The hypothesis
proves statistically significant with the causality test value of 0.08 > 05 % significant level which means
that we fail to accept null hypothesis and thus reject it and conclude interest rate is the compelling factor
that causes fluctuation in stock prices of the Ghana stock exchange. These findings support the results of
[20] who found a causal relation between interest rates and stock exchange prices.
6. Recommendations
Several studies were conducted to find the relationship between macroeconomic variables and
stock prices [1,3,24]. This study investigated the effects of interest rates on stock prices of the Ghana
stock exchange. This research generally fit the aims and objectives of this study. Discussion of the
results, conclusions, and practical recommendations and recommendations for the future are, however,
made to further improve upon the findings of this research.
Therefore, investors in the Ghana stock exchange need to consider interest rates before taking
investment decisions. This is another area of concern, which the Ghana stock exchange needs to critically
observe, because with data like that of 2011, the naïve investor will find it difficult to study the market
activities. Even the existing investors and potential investors could hardly study a market activity similar
to these, and this will even lead to inefficient market Hypothesis, hence, limited accessibility to
information available in the market. This confirms the research founding’s by [12] the efficient market
hypothesis provided that at any given period and in a liquid market, securities prices fully reflect all
available information.

7.Discussion of Results

The findings and results of the study found that based on the research questions the hypothesis established
statistical significant with the causality test value of 0.08 > 05 % significant level which means that we
fail to accept null hypothesis and thus reject it and conclude interest rate is the compelling factor
that causes fluctuation in stock prices of the Ghana stock exchange .The results of Granger causality
were reported in the analysis. The result shows the existence of bidirectional causality among interest
rate and stock prices. At 5% level of significant the null hypothesis can be rejected, that interest rate does
not Granger cause stock prices and concludes that interest rate Granger causes stock prices. However, the
null hypothesis fails to be rejected, that Stock prices do not Granger cause interest rate. Thus, there is a
unidirectional causality moving from interest rates to stock prices. In other words, interest rates are one
compelling factor in the stock price variables. These findings support the results of [20] who found causal
relationships between interest rate sand stock exchange prices.

8.Conclusion
Theoretically, the relationship involving exchange rates and stocks can be assumed as either positive -
currency depreciation makes local firms more aggressive, leading to an increase in exports and a
consequent stock prices increase; or negative. If the production is dependent on imported effort, the cost
of production would rise as a result of currency depreciation, thus decrease profitability and result in turn
down of stock returns and a weak or no relationship [2]. This study performed the DF Unit Root Test,
Ordinary Least Square regression and autocorrelation, and the Causality test. Different methodology and
regression approach could be adopted to review the same topic so the results could be compared.
 Appendices

Appendix

Regression Analysis Results

Table 1

Unit Root Tests

Null Hypothesis: LNI has a unit root

Exogenous: None
Lag Length: 5 (Automatic - based on SIC, maxlag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic 0.057113 0.6933

Test critical values: 1% level -2.644302
5% level -1.952473
10% level -1.610211

Null Hypothesis: LNS has a unit root

Exogenous: None
Lag Length: 1 (Automatic - based on SIC, maxlag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic 1.214712 0.9394

Test critical values: 1% level -2.634731
5% level -1.951000
10% level -1.610907
 9

Table 2

Least Squares Regression

Dependent Variable: LNS

Method: Least Squares
Date: 05/02/15 Time: 14:46
Sample: 160
Included observations: 60

Variable Coefficient Std. Error t-Statistic Prob.

LNI -1.475644 0.751342 -1.964011 0.0577

C 8.683520 0.787068 11.03274 0.0000

R-squared 0.101891 Mean dependent var 7.140471

Adjusted R-squared 0.075476 S.D. dependent var 0.293469
S.E. of regression 0.282177 Akaike info criterion 0.361387
Sum squared resid 2.707207 Schwarz criterion 0.449360
Log likelihood -4.504963 Hannan-Quinn criter. 0.392092
F-statistic 3.857339 Durbin-Watson stat 0.298697
Prob(F-statistic) 0.057747
Table 3

Test of Autocorrelation

Breusch-Godfrey Serial Correlation LM Test:

F-statistic 41.36077 Prob. F(6,28) 0.0000

Obs*R-squared 32.35000 Prob. Chi-Square(6) 0.0000

Test Equation:
Dependent Variable: RESID
Method: Least Squares
Date: 05/02/15 Time: 14:50
Sample: 160
Included observations:60
Presample missing value lagged residuals set to zero.

Variable Coefficient Std. Error t-Statistic Prob.

LNI 1.794463 0.330729 5.425784 0.0000

C -1.842002 0.343338 -5.364976 0.0000
RESID(-1) 0.730477 0.136083 5.367862 0.0000
RESID(-2) 0.379921 0.149698 2.537911 0.0170
RESID(-3) -0.070814 0.164167 -0.431351 0.6695
RESID(-4) -0.220198 0.152394 -1.444923 0.1596
RESID(-5) 0.202434 0.152807 1.324767 0.1960
RESID(-6) 0.235973 0.145515 1.621641 0.1161

R-squared 0.898611 Mean dependent var 6.26E-16

Adjusted R-squared 0.873264 S.D. dependent var 0.278116
S.E. of regression 0.099009 Akaike info criterion -1.594072
Sum squared resid 0.274481 Schwarz criterion -1.242179
Log likelihood 36.69330 Hannan-Quinn criter. -1.471252
F-statistic 35.45209 Durbin-Watson stat 0.831920
Prob(F-statistic) 0.000000
 11

Table 4

Test of Causality

Pairwise Granger Causality Tests

Date: 05/02/15 Time: 14:51
Sample: 160
Lags: 2

Null Hypothesis: Obs F-Statistic Prob.

LNI does not Granger Cause LNS 34 2.74740 0.0808

LNS does not Granger Cause LNI 2.31345 0.1169

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