Emmanuel Joel Aikins Abakah^1,, Frank Adusah-Poku²

Budget deficits and stock markets play vital role functions to a country’s economic condition. Thus, this study aims to provide empirical evidence regarding the causality between real budget deficits and real stock market returns in Ghana. We investigate whether changes in budget deficits cause changes in stock prices using monthly data adjusted for inflation from January 2008 to December, 2015 applying VAR framework. Granger Causality test and Impulse Response Functions (IRFs) were also used to aid in the analyses of the results. The sample data was divided into two sub-samples for the period of 2008-2010 (sample 1) and 2011-2015 (sample 2) due to the shift from All Share Index to Composite Index in 2011. The results of this study suggest a significant positive relationship between real stock market returns and real budget deficit for both samples which is in contrast to prior studies. The results further suggest that, for sample 1, budget deficit Granger Cause stocks but stocks does not Granger Cause budget deficit while for sample 2,both budget deficit and stocks does not Granger Cause each other. For sample 1, a shock of deficit of 1% resulted in a decrease in stocks. For sample 2, a shock of deficit of 1% results in a simultaneous increase in stocks.

budget deficits, stock market returns, Ghana, VAR framework, granger causality