MACROECONOMIC DETERMINANTS OF MALAWI STOCK

EXCHANGE MARKET DEVELOPMENT

BY

WASILI HOPE MFUNGWE

(BSOC/29/04)

Submitted to the Department of Economics, University of Malawi, in partial

fulfillment of the requirements of a Bachelors Degree in Social Science with a bias in
Economics
January, 2009

DECLARATION
I hereby declare that this dissertation is my original work and that it has not been
presented to any other University for any degree award. Work of others used in this study
has been appropriately acknowledged.

Signature .
Wasili Hope Mfungwe
Date

ii

CERTIFICATE OF APPROVAL
I declare that this thesis is from the students own work and effort and where he has used
other sources of information, it has been acknowledged. This thesis is submitted with our
approval.

Supervisor

..
Dr. R. Mangani

Date

iii

DEDICATION
To my grandmother Ellen Sindwere Mfungwe (Namsompha) Uchala a kutule those
words still linger in my brain

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ACKNOWLEDGEMENT
First and foremost Praise be to God through whom all things are possible.
I would like to express my sincere gratitude to my supervisor Dr. Ronald Mangani for his
guidance and encouragement throughout the preparation period of this paper.
I am gratefully indebted to the entire Department of Economics staff your presence has
made a difference.
My very special thanks to my parents, Aunt Alice, brothers and sisters and cousins you
guys have been very supportive. May the Almighty God richly bless you.

My special thanks to everyone who extended a helping hand it might be just time on your
computer, encouragement, your prayers, your quality time, the list is endless and I dont
take it lightly.
I would like to appreciate Naomie, Chifundo, Mesho, Grace, Barbara, John, Fred and all
my classmates; you have made my stay colorful.

ABSTRACT
The purpose of this study is to explore macroeconomic determinants which must have an
important influence on the development of the Malawi Stock Exchange. The empirical
study is conducted using quarterly data from the last quarter of 1996 to the third quarter
of 2008. Cointegration and the error correction model techniques are employed to
ascertain both short- and long-run relationships. Findings of the study reveal that the
exchange rate depreciation and the investment rate are important determinants of the
development of the stock market and inflation negatively affects the development of the
stock market in the long run. Financial sector development, stock market liquidity and
political risk are found to have no economic significance in the development of the stock
market.This paper has some policy implications to the country. In order to promote stock
market development in this country, it is important to encourage investment by
appropriate incentives, to liberalize the exchange rate, to improve stock market liquidity,
to develop financial intermediaries and to control inflation. Since it is unclear whether the
Malawi Stock Exchange being an emerging market responds, in the same way, to
economic and political shocks like other emerging markets and/or developed markets.
This paper fills this gap by making an analysis of the Malawian capital market in order
to assess how it can be improved , and hence, benefit the country.

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TABLE OF CONTENTS
DEDICATION .................................................................................................................... ii

DECLARATION ............................................................................................................... iii

DEDICATION ................................................................................................................... iv
ACKNOWLEDGEMENT .................................................................................................. v
ABSTRACT ....................................................................................................................... vi
LIST OF TABLES ........................................................................................................... viii
LIST OF ACRONYMS ..................................................................................................... ix
CHAPTER ONE ................................................................Error! Bookmark not defined.
INTRODUCTION .............................................................Error! Bookmark not defined.
1.1 Background ..............................................................Error! Bookmark not defined.
1.2 Research Problem ....................................................Error! Bookmark not defined.
1.3 Objectives of the Study ............................................Error! Bookmark not defined.
1.4 Test Hypotheses .......................................................Error! Bookmark not defined.
1.5 Organization of the Study ......................................................................................... 4
CHAPTER TWO ................................................................................................................ 5
LITERATURE REVIEW ................................................................................................... 5
2.1 Theoretical literature ................................................................................................. 5
2.11 Preconditiods for Stock Market Development in Africa ........................................ 5
2.1.2 The Two Building Blocks for Thriving stock markets ...................................... 6
2.1.3 The Calderon-Rossel Model .............................................................................. 7
2.1.4 The Modified Calderon-Rossel Model .............................................................. 8
2.1.5 The Gordon Growth Model ............................................................................ 9
2.1.6 Traits of Characteristics of Stock Market Development.................................... 9
2.1.7 The Arbitrage Pricing (APT) Model .................................................................. 9
2.2 Empirical Evidence ................................................................................................. 10

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CHAPTER THREE .......................................................................................................... 11

METHODOLOGY ........................................................................................................... 13
3.1 Model Specification ................................................................................................ 13
3.2 Description and Measurement of Variables ............................................................ 14
3.3 Data Sources ........................................................................................................... 16
3.4 Estimation Technique..16
3.4 Estimation Procedure..17
3.4.1 Unit-root test .................................................................................................... 18
3.4.2 Cointergration ...................................................................................................... 17
3.4.3 Error Correction Models .................................................................................. 18
3.5 Diagonistic Tests ..................................................................................................... 18
3.5.1 Test for Serial Correlation ................................................................................... 18
3.5.2 Test for Heteroscedasticity .................................................................................. 19
3.5.3 Test for Correct model Specification .................................................................... 19
CHAPTER FOUR ............................................................................................................. 21
EMPERICAL RESULTS AND DISCUSSION ............................................................... 21
4.1 Introduction ............................................................................................................. 21
4.2 Long run regression results ..................................................................................... 21
4.2.1 Diagnostic Test ................................................................................................... 21
4.2.2 Discussion of Results ........................................................................................... 22
4.3 Short Run Error corection Results .......................................................................... 23
4.3.1 Diagnostic Tests ................................................................................................... 23
4.3.2 Discussion of Results ........................................................................................... 24

CHAPTER FIVE .............................................................................................................. 27

CONCLUSION ................................................................................................................. 27
5.1 Summary ................................................................................................................. 27
5.2 Policy Recommendation ......................................................................................... 27
5.3 Limitations and Areas for Further Study ................................................................ 27
BIBLIOGRAPHY ............................................................................................................. 28

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

LIST OF TABLES
Table 3.4 Unit Root Test Results..16
Table 3.5 Augmented Engle- Granger two step Cointergration tests .17

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LIST OF ACRONYMS
GDP

Gross Domestic Product

MSE

Malawi Stock Exchange

SSA

Sub Saharan Africa

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