Modeling stock price dynamics on the Ghana Stock Exchange: A Geometric Brownian Motion approach

TL;DR

This paper assesses whether the Geometric Brownian Motion model accurately describes weekly and monthly stock returns on the Ghana Stock Exchange, finding it generally reliable with some deviations.

Contribution

It evaluates the applicability of the GBM model to Ghanaian equities and estimates its parameters for practical stock price forecasting.

Findings

Modeled prices closely match actual prices

Actual prices mostly within confidence intervals

Forecasts are reasonably accurate over three months

Abstract

Modeling financial data often relies on assumptions that may prove insufficient or unrealistic in practice. The Geometric Brownian Motion (GBM) model is frequently employed to represent stock price processes. This study investigates whether the behavior of weekly and monthly returns of selected equities listed on the Ghana Stock Exchange conforms to the GBM model. Parameters of the GBM model were estimated for five equities, and forecasts were generated for three months. Evaluation of estimation accuracy was conducted using mean square error (MSE). Results indicate that the expected prices from the modeled equities closely align with actual stock prices observed on the Exchange. Furthermore, while some deviations were observed, the actual prices consistently fell within the estimated confidence intervals.