Impediments to the Operation of the Ghana Stock Exchange - Essay Example

Impediments to the Operation of the Ghana Stock Exchange Abstract Within the international financial market, the development of many obstacles regarding the operation and the monitoring of transactions is a common phenomenon. This issue is of particular importance when referring to the operation of Stock Exchanges around the world. In fact, the operation and monitoring of Stock Exchanges within the international market has been extensively criticized as of its effectiveness as well as regarding the security of the transactions involved. In many cases, the transactions made through Stock Exchanges are not quite ‘transparent’; as a result Stock Exchange has been often characterized as a ‘vehicle’ for the development of illegal financial activities. However, the value of Stock Exchanges for the financial development of all countries internationally cannot be doubted. Current paper refers especially to Ghana Stock Exchange and the impediments that appear in relation with the daily operation of the particular Stock Exchange. Towards this direction, the role of Ghana Stock Exchange regarding the development of the particular country is examined; the general characteristics of the above Stock Exchange are also presented trying to identify the reasons that have led to the development of impediments in the operation of the specific Stock Exchange. In order for the relevant study to be more complete, the general financial, political and social environment of Ghana are going to be discussed briefly as to their role on the operation of the country’s Stock Exchange. 1.1 Introduction Ghana Stock Exchange is considered to be one of the most powerful in Africa. Its structure can explain its effectiveness in most financial transactions. More specifically, the particular Stock Exchange is structured as follows: ‘the Ghana Stock Exchange is governed by a Council of thirteen representing Licensed Dealing Members, Listed Companies, Banks, Insurance Companies, Money Market Institutions, and the Ghanaian General Public’ [4]. It should be noticed that the effectiveness of the particular Stock Exchange has been limited during 2006 mostly because of a financial crisis that referred to most Stock markets internationally. In fact, it has been found that ‘the market in 2006, made a slow but steady recovery from the down turn of 2005; this was evident in the over subscriptions recorded in the listings that were made during the year; against a background of stable macro economic environment, continuing decline in interest and inflation rates, a stable exchange rate regime and impressive results by many of the listed companies, this was expected’ [1]. In the above case, the country’s economy also suffered a severe crisis. The relationship between the stock market, the level of foreign investment and the risk related with a particular country has been proved to be direct. More specifically, in accordance with the study of El-Wassal (2005) there is a strong link between the stock market growth and the investment made to the country at least for a particular period of time. The above assumption is also supported by the views of the research made by El-Wassal (2005) who found that ‘economic growth, financial liberalisation policies and foreign portfolio investments were the leading factors of the emerging stock markets growth; this seems to validate the demand-following hypothesis suggesting that economic growth has indeed activated stock markets in these countries’ (El – Wassal, 2005, 227). In other words, the performance of a particular Stock Exchange within the international market can be strongly influenced by the level of development of local economy. However, the performance of Ghana Stock Exchange (as of most Stock Exchanges internationally) can be highly influenced by the intervention of impediments that would cause delays and cancellations in the realization of specific investment plans. 1.2 Aims and objectives of the research In current paper the issues under examination could be summarized to the following ones: a) which are the factors that serve as impediments to the operation of Ghana Stock Exchange? b) if applied to the case of Ghana Stock exchange, the weak hypothesis model could lead to the production of specific evidence? Other models would be possibly more appropriate for the particular field; c) how information is handled within Ghana Stock Exchange and d) which are the effects of information provided through the particular Stock Exchange? 1.3 Significance of the study The role of Ghana Stock Exchange in the development of the particular country is – as already mentioned above – quite important. In fact, the transactions made through the above Stock Exchange should be considered as offering a major support to the country’s economy. However, the effectiveness of the relevant Stock Exchange should be precisely (as possible) measured and evaluated in order to identify any possible policy that should be reviewed in order for the performance to be increased. For the above reasons, current study is considered to be significant offering the chance to examine and analyze the role of Ghana Stock Exchange in the national economy and identify any impediments that cause delays in the increase of performance of the particular Stock Exchange. LITERATURE REVIEW Ghana Stock Exchange operated for first time in 1990. The beginning of trading through the Stock Exchange was a significant event for the country’s economy. Regarding this issue, it is noticed that the Exchange ‘has been progressively strengthening its facilities for businesses and the Government to raise long term capital as well as for investors to obtain liquidity, reasonable capital safety and diversity of investments’ [2]. The administration of Ghana Stock Exchange is very carefully planned. In fact, it is noticed that the particular Stock Exchange ‘is governed by a Council with representation from Licensed Dealing Members (LDMs), Listed Companies, Banks, Insurance Companies, Money Market and the General Public; the Exchange also has a well qualified and experienced management team’ [2]. The importance of Ghana Stock Exchange for the development of national economy cannot be doubted. In fact, it should be noticed that the operation of Ghana Stock Exchange has attracted many foreign investors that are interested to enter the country’s market while in terms of the corporate activities of local firms the indicators are also positive. The performance of the particular Stock Exchange can be viewed in Figure 1 below in which financial data related with the performance of Ghana Stock Exchange are presented analytically (referring to the period from December 2004 up to November 2007). Market Highlights as at : 27/11/2007 Αρχή φόρμας Τέλος φόρμας   Market Indicators Equities Year to Date December 2005 December 2004 GSE All Share Index: 6,130.27 4,769.02 6,798.59 Year-to-date change: 22.46 % -29.85% 91.33% Market Capitalization: 12,070 Billion 91,857.28 Billion 97,614.82 Billion Total Volume Traded: 2,319,000.00 81.40 Million 104.35 Million Corporate Bonds Traded   Bond ISIN Value Current Price Figure 1 – Ghana Stock Exchange, performance as of November 2007, source: [1] In accordance with a report published by the Ghana Embassy in Japan [3], the Ghana Stock Exchange has offered a significant help towards the development of the country’s economy. More specifically, it is mentioned that ‘the Exchange has put in place facilities for businesses and the Government to raise long-term capital as well as for investors to obtain liquidity and diversity of investments; since its establishment, many companies as well as the government have raised funds through the floatation of company shares and bonds to the general public’ (Ghana Embassy in Japan, [3]). Under these terms, the development of corporate activity in Ghana (both related with local and foreign entrepreneurs) should be considered as being the result of a well structured Stock Exchange market. On the other hand, it should be noticed that the operation of the above Stock Exchange faces significant obstacles or else impediments. The above issue is highlighted in a research made by Owusu (2001) who found that ‘several firms are discouraged from operating on the GSE due to the high rate of inflation, slow services and perceived high risk; GSE provides adequate information on stock indexes and the price of foreign stocks but inadequate information on new securities issues and the number of rises and falls; TV, radio and newspapers are the most effective media that inform Ghanaians about the activities of the GSE’ (Owusu, 2001, 122). In other words, handling of information (referring especially to the delivery of information to the public) is considered to be the major operational problem of Ghana Stock Exchange. This problem could be effectively resolved only if appropriate practices were to be introduced and applied by the Stock Exchange’s central administration (Council). PROPOSED METHODS The examination of the particular issue will be based on the Random walk Hypothesis. It should be noticed primarily that the random walk hypothesis ‘asserts that price movements will not follow any patterns or trends and that past price movements cannot be used to predict future price movements’ [6]. Especially regarding the weak form of the efficient market hypothesis (which is going to be used in current research) it should be mentioned that ‘the "Weak" form asserts that all past market prices and data are fully reflected in securities prices. In other words, technical analysis is of no use’ [6]. To a more analytical explanation of the characteristics of this theory it is noticed that in random walk model ‘prices have no memory, therefore past and present prices cannot be used to predict future prices (as implied in technical analysis); prices move at random and adjust to new information as it comes available; the adjustment to this new information is so fast that it is impossible to profit from it’ [7]. The particular method has been used again in the past (see relevant research published in the following site: [5]). The research in which Random Walk Hypothesis was tested in the past ‘models and forecasts volatility (conditional variance) on the Ghana Stock Exchange using a random walk (RW), GARCH(1,1), EGARCH(1,1), and TGARCH(1,1) models’ [5]. Using these models the volatility of GSE has been examined for a 10-years period. The application of the Random Walk Hypothesis could be proved in this way valuable towards the evaluation of this paper’s main subject. In accordance with the above, because Random Walk Hypothesis has already been used in a similar research it could be expected to perform positively in this research also. As for the data that will be used throughout the research, these will be financial data related with the operational activities of GSE for a 5 – years period. It should be noticed that all these data are going to be retrieved from the official website of Ghana Stock Exchange. Any required additional resource will be retrieved by the country’s available resources related with the national economy (like the ministry of finance and so on). REFLECTION As already mentioned above the examination of the problems related with GSE’s operational activities will be based on the Random Walk Hypothesis. However, it should be noticed that despite the effectiveness of the above research method, there are certain issues that need to be taken into consideration before proceeding to the application of the relevant plan (empirical research) in practice. At a first level, a series of practical problems will occur referring mostly to the retrieval of data required for the particular research. Because the research examines the operational problems of a Stock Exchange, it could be expected that the data involved would be only partially available. In other words, only data published by the firms participating in the specific Stock Exchange would be available. On the other hand, current research has to face a series of problems related with the ethics applied in the particular area. In this context, only data generally available to the public could be used in current research; no data related with GSE’s activities in general could be used if their disposal/ publication is prohibited by the relevant laws and the commercial ethics. CONCLUSION As stated above, Ghana Stock Exchange has a significant impact on the development of the country’s economy. However, there are also problems that need to be resolved in order for GSE to achieve the targets set by the Council (the GSE’s central administration unit). The performance of GSE has been extensively examined using a series of models. In this context, Quartey et al. (2007) tried to identify ‘how macro-economic factors affect Stock Market development in Ghana using the Johansen's cointegration procedure; a related finding is that real income, gross domestic savings, domestic credit to the private sector, and exchange rate predict the long run development of the Ghana Stock exchange; however, Treasury bill rates have negative impact on the long run development of the GSE’ (Quartey et al., 2007, 105). In accordance with the above and taking into account the problems related with the operation of Ghana Stock Exchange it could be suggested that despite the fact that GSE faces many impediments - that are expanded in most operational activities of the above Stock Exchange – the development of appropriate strategies could help GSE to effectively handle the relevant issue and improve its performance. The use of random walk hypothesis and of the weak hypothesis model for the identification and the evaluation of the problems related with the operation of GSE has been proved to be particularly helpful for the improvement of GSE’s performance in the long term. References El-Wassal, K. (2005) Understanding the Growth in Emerging Stock Markets. Journal of Emerging Market Finance, 4(3): 227-261 Owusu-Frimpong, N. (2001) The causes and consequences of a poor-performing emerging stock market in sub-Saharan Africa: The case of the Ghana Stock Exchange. Journal of Financial Services Marketing, 6: 122-132 Quartey, P., Gaddah, M. (2007) Long Run Determinants of Stock Market Development in Ghana, 105-125 Websites http://www.gse.com.gh/publications/default.asp?link=brochures [1] http://ourworld.compuserve.com/homepages/khaganu/stockex.htm [2] http://www.ghanaembassy.or.jp/business/stock-exchange.html [3] http://www.financewise.com/public/edit/africa/links/af-exch.htm [4] http://ideas.repec.org/p/pra/mprapa/593.html) [5] http://www.investorhome.com/emh.htm [6] http://stockcharts.com/school/doku.php?id=chart_school:overview:random_walk_theory [7] Read More