Stock Market Development in Ghana: Whither Trade Openness

This paper empirically examines the relationship between trade openness and stock market development in Ghana. The analysis was framed in a multivariate setting consisting of trade openness, per capita GDP, turnover ratio, value traded ratio, ratio of bank credit to the private sector to GDP and institutional quality over the period of 1991(Q1) to 2015(Q4). The Johansen cointegration analysis in VAR was used to assess the existence of long-run relationship among the series. VECM causality tests was conducted to ascertain the direction of causality among the variables. Variance decomposition assessment was used to forecast the future relationship among the variables. The results revealed the presence of cointegration (long-run relationship) in the series. More importantly, trade openness and institutional quality had positive and significant impact on stock market development in the long and short run. The study also found evidence of substitutability between the stock market and development in the banking making in Ghana. Additionally, Innovations in each of the variables has effect on stock market development but more pronounced effect was found in innovations in trade openness.