Effect of commodity prices on financial soundness; insight from adaptive market hypothesis in the Ghanaian setting

Collins Baffour Kyei, William Godfred Cantah and Peterson Junior Owusu

Resources Policy, 2023, vol. 86, issue PA

Abstract: Commodity revenue is a greater portion of total merchandise export in Ghana. Fluctuations in commodity prices directly and indirectly affect the financial soundness of an economy. Hence, we assessed the effect of commodity prices on banking sector's financial soundness indicators (BsFSI) under diverse market (bullish, normal and bearish) conditions. We employed monthly data on commodity prices and BsFSI from January 2007 to March 2022. We employed quantile regression and causality in quantile estimation techniques. The results from the quantile regression showed that commodity (cocoa, gold and crude oil) prices significantly affect Ghana's BsFSI at diverse market conditions asymmetrically. The specific predictive power noticed depends on the financial soundness indicator as well as the condition of the market. The results confirm the adaptive market hypothesis in the Ghanaian economy implying the inefficiency in the soundness of the financial sector. This allows traders and investors to adapt their strategies in response to changing financial sector conditions. Our findings are important to policy makers for the implementation of commodity price stabilisation schemes and hedging strategies while considering market conditions.

Keywords: Adaptive market hypothesis; Quantile regression; Causality in quantiles; Commodity prices; Banking sector's financial sector indicator; Schwartz hypothesis (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jrpoli:v:86:y:2023:i:pa:s0301420723007870

DOI: 10.1016/j.resourpol.2023.104076

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