The Study of Causal Relationship between Stock Market Indices and Macroeconomic Variables in Cote d’Ivoire: Evidence from Error-Correction Models and Granger Causality Test

Abstract

This paper investigates the role of macroeconomic variables on stock prices movement in Cote d'Ivoire. We utilize the stock price index (SPI) call BRVM10 to represent Cote d'Ivoire stock market and some relevant macroeconomic variables such as industrial production index (IPI), consumer price index (CPI), domestic interest rate (IR), real exchange rate (EXR) and real money supply (M 2). We examine both long-run and short-run dynamic relationships between the stock market index and the economic variables with quarterly data covering the period of 1999:1 to 2007:4 using Johansen's multivariate cointegration test techniques. The study identified that there is cointegration between macroeconomic variables and Stock prices in Cote d'Ivoire indicating long-run relationship. The results of Impulse Response Function (IRF) and Forecast Error Variance Decomposition (FEVD) demonstrate that out of five macroeconomic variables selected, only consumer price index (CPI) and domestic interest rate (IR) are the key determinants of the stock price movements in Cote d'Ivoire. The Granger-causality test based on the vector autoregressive (VAR) analytical framework was employed to empirically reveal that there is strong bi-directional relationship between stock price index (SPI) and domestic interest rate (IR).Thus, changes in the domestic interest rate might be used to predict the future stock price movement. The research also found that macroeconomic factors are not appropriate indicators to forecast the future behavior of the stock index movements in Cote d'Ivoire.