Monetary Policy and Stock Market Returns in Uganda (July 2011 - December 2017)

ABSTRACT Low volume of trade activity at the Uganda Securities Exchange is strongly evidenced by the lack of much attention by the monetary authorities in Uganda. However, this study sought to determine the effect of monetary policy on stock market returns in Uganda using time series data for the period July 2011-December 2017. Data was obtained from the Uganda Securities Exchange, the Bank of Uganda and the Uganda Bureau of Statistics reports. The collected data were analyzed using Excel 2010 and EViews (Economic Views) version 9. The independent variables for this study were the monetary policy variables namely the central bank rate, the Treasury bill rate and the inflation rate measured using the consumer price index while the dependent variable was stock market returns measured using USE all share index. To investigate the effect of monetary policy on stock market returns in Uganda the study explored the McKinnon-Shaw Hypothesis; the Fisher effect theory, the Efficient Market Hypothesis and the Capital Asset pricing model. Ex post facto research design was adopted. The results of descriptive statistics established that mean value of the stock market returns was 1530.88 whereas the average central bank rate and treasury bill rate were 13.74 and 12.37 respectively while average consumer price index was 146.76. The results of the Augmented Dickey Fuller (ADF) and the Phillips-Perron (PP) test found that the time series had a unit root. The Co-integration test result found that there is a long run relationship between monetary policy and stock market returns in Uganda. The OLS regression result indicated that monetary policy in Uganda strongly influences the stock market return. Both monetary policy variables have significant effects on stock market returns in Uganda. There was no presence of autocorrelation in the models as evidenced by the Durbin Watson test statistics. Monetary policy authorities and investors should use this study’s findings which suggest that monetary policy environment has an influence on stock market returns. This study provides a reference material for other researchers in similar study area as well as enhances understanding in the effect of monetary policy on stock returns as it combines the three selected monetary policy indicators in the model and examines the model against recent data that is, data for the period July 2011-December 2017.

TABLE OF CONTENTS

DECLARATION .............................................................................................................................I

APPROVAL ...................................................................................................................................II

DEDICATION.............................................................................................................................. III

ACKNOWLEDGEMENT............................................................................................................IV

TABLE OF CONTENTS............................................................................................................... V

LIST OF TABLES..................................................................................................................... VIII

LIST OF ABBREVIATIONS.......................................................................................................IX

ABSTRACT................................................................................................................................... X

CHAPTER ONE............................................................................................................................. 1

INTRODUCTION....................................................................................................................... 1

1.0 Introduction ....................................................................................................................... 1

1.1 Background to the study.................................................................................................... 1

1.2 Problem Statement............................................................................................................. 8

1.3 Purpose of the study .......................................................................................................... 9

1.4 Objectives of the study ...................................................................................................... 9

1.5 Research questions ............................................................................................................ 9

1.6 Hypotheses....................................................................................................................... 10

1.7 Scope of the study............................................................................................................ 10

1.8 Significance of the study ................................................................................................. 10

1.9. Operation definitions of key terms................................................................................. 11

CHAPTER TWO .......................................................................................................................... 13

LITERTURE REVIEW............................................................................................................. 13

2.0 Introduction ..................................................................................................................... 13

2.1. Theoretical Review......................................................................................................... 13

2.1.1. The McKinnon-Shaw Hypothesis ............................................................................... 13

2.1.3 The Fisher Effect Theory.............................................................................................. 15

2.1.2. The Efficient Markets Hypothesis............................................................................... 15

2.1.3. The capital asset pricing model ................................................................................... 16

2.2 Conceptual review ........................................................................................................... 19

2.3. Review of related studies................................................................................................ 23

VI

2.4 Research gaps.................................................................................................................. 31

CHAPTER THREE ...................................................................................................................... 32

RESEARCH METHODOLOGY.............................................................................................. 32

3.0. Introduction .................................................................................................................... 32

3.1 Research Design .............................................................................................................. 32

3.2 Nature and Sources of Data ............................................................................................. 32

3.3 Model Specification......................................................................................................... 32

3.4 Measurement of Variables............................................................................................... 34

3.5 Data Analysis................................................................................................................... 35

3.6 Test of Significance ......................................................................................................... 37

3.7 Decision rule.................................................................................................................... 37

CHAPTER FOUR......................................................................................................................... 38

DATA PRESENTATION, ANALYSIS AND INTERPRETATION....................................... 38

4.0 Introduction ..................................................................................................................... 38

4.1 Descriptive Statistics ....................................................................................................... 38

4.2 Stationarity Test............................................................................................................... 40

4.3 Co-integration test ........................................................................................................... 41

4.4 Regression analysis.......................................................................................................... 42

4.5 Post estimation results..................................................................................................... 44

CHAPTER FIVE .......................................................................................................................... 45

DISCUSSIONS, CONCLUSIONS AND RECOMMENDATIONS........................................ 45

5.0 Introduction ..................................................................................................................... 45

5.1 Discussion of findings..................................................................................................... 45

5.1.1 Discussion on the Effect of the Central Bank rate on Stock Returns in Uganda ......... 45

5.1.2 Discussion on the effect of the Treasury bill Rate on Stock Returns in Uganda ......... 46

5.1.2 Discussion on the effect of Inflation on Stock Returns in Uganda .............................. 47

5.1.3 Discussion on the Effect of Monetary policy on Stock Returns in Uganda ................. 48

5.2 Conclusion....................................................................................................................... 49

5.4 Recommendations ........................................................................................................... 49

5.5 Limitations of the study................................................................................................... 50

5.6 Areas of further study...................................................................................................... 51

5.7 Contribution to Knowledge ............................................................................................. 52

REFERENCES ..............................................................................Error! Bookmark not defined.

APPENDICES ...............................................................................Error! Bookmark not defined.