ABSTRACT
The study is an attempt to investigate the impact of selected macroeconomic variables on stock prices in the Nigeria capital market .To capture the objectives of the study, the study adopted an autoregressive distributed lag model as well as a causality test. The dependent variable was all share price index (ASI) and the independent variables were industrial output, exchange rate, consumer price index, market capitalization ratio, turnover ratio and value of deals traded. Quarterly time series data ranging from 1985q1 to 2018q4 were employed for the analysis. The study established the existence of a statistically significant relationship between stock prices, consumer price index and industrial output in Nigeria. Furthermore, evidence of bidirectional causality was found between Stock prices and industrial output. Among other things, the study recommends the adoption of policies both structural and institutional that will enhance macroeconomic stability and ensure output growth.
TABLE OF CONTENTS
Title
Page i
Declaration ii
Certification
iii
Dedication
iv
Acknowledgements v
Table
of contents vi
List
of Tables ix
Abstract
x
CHAPTER 1: INTRODUCTION
1.1
Background to the Study 1
1.2
Statement of the Problem 6
1.3 Research Questions 10
1.4 Objectives of the
Study 10
1.5 Research Hypotheses 10
1.6 Significance of the Study 11
1.7
Scopes and Limitations of the Study 12
CHAPTER 2: LITERATURE
REVIEW
2.1
Conceptual Framework 13
2.1.1 Stock market 13
2.1.2 Macroeconomic indicators 14
2.2
Theoretical Review 15
2.2.1 The
efficient market hypothesis is a theory that claims that market are efficient
(EMH) Fama created the efficient market phypothesis (EMH) (1965) 15
2.2.2 Portfolio
theory in the modern age (MPT). Markowitz pioneered the modern portfolio theory
(MPT) 16
2.2.3 Theory
of arbitrage pricing (APT) 16
2.2.4 Capital
assests pricing model (CAPM) 17
2.2.5 Divided
discount model (DDM) 18
2.3 Empirical Review 19
2.3.1 Review of foreign studies 19
2.3.2 Domestic studies review 25
2.4 Previous Study Limitations and Value
Added 33
CHAPTER 3: RESEARCH
METHOD
3.1
Theoretical Framework 34
3.2
Model Specification 35
3.3
Estimation Technique 38
3.4
Other Test 39
3.5 Model Justification 39
3.6 Description of Variables 39
3.7 Sources of Data 41
3.8 Software Package 41
CHAPTER
4: RESULT AND ANALYSIS
4.1 Descriptive
Statistics 42
4.2 Unit
Root Test 42
4.3 Cointegration
Test 43
CHAPTER
5: SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSION
5.1 Summary of Findings
52
5.2 Policy
Recommendation 54
5.3 Conclusion 56
Reference 58
Appendices 69
LIST OF TABLES
4.1 Descriptive
Statistics 42
4.2 ADF
Unit Root Test 43
4.4 ARDL
Bound Test 44
4.5 Dynamic
Short run error correction model 44
4.6
Static Long run Model 46
4.7 Causality
Test 48
4.8 Breusch
– Godfrey Correlation LM Test 50
4.9 Heteroskedasticity
Test Breusch – pagan – Godfrey 50
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
A stock exchange market is the hub of a
network of transactions that brings together buyers and sellers of securities
at a set price. As a result of the liberalized and globalized policies
established by most emerging and developed governments, the stock market plays
a vital role in the mobilization of capital in emerging and developed
countries, contributing to the growth of industry and commerce. Khodaparasti
(2014) argues that stock market appears to be more efficient and more dynamic
in the allocation of resources and contributed immensely in the development
sector. Issahaku, Ustarz and Domanban (2013) posit that a well-organized stock
exchange market is critical in the mobilization of domestic and foreign
capital, and the stock exchange market plays major role in the mobilization of
long-term funds for firms.
The stock market is said to play a significant
role in financial intermediation for both rich and developing countries by
directing idle cash from surplus to deficit units, mobilizing funds for the real
sector, and supporting government capital and deficit expenditures (Okereke-Onyiuke,
2010). According to Olarotimi (2008), the lack of an effective and efficient
capital market that mobilizes and allocates surplus money to the economy's
deficit units may result in these funds becoming idle and thus unproductive. As
a result, the market acts as a conduit for surplus funds to be transferred from
lender-savers to borrower-spenders who are short on cash for investment (Black,
1988). Individuals, governments, businesses, and organizations can use it to
trade and invest in savings by purchasing shares (Sule and Momoh; 2009).
It is common knowledge that investments that
encourage economic growth and development necessitate long-term funding, far
longer than most people are ready to commit their assets for (Maku and Atanda,
2009). As a result, the stock markets are thought to represent the economy's
heartbeat because of their ability to react nearly instantly to fundamental
changes in the economy.
In any healthy economic climate, they
encourage savings and actual investment by channeling aggregate savings into
real investment, which enhances the capital stock and thus the country's
economic growth. They give discerning minds the ability to detect the pulse of
such an economy because of this quality. These markets are more than just a
venue to exchange stocks; they act as a conduit between savers and investors,
pooling funds, sharing risk, and transferring wealth. Mobilization of savings,
production of liquidity, risk diversification, improved acquisition and
transmission of information and increased incentive for corporate governance
are only a few of the purposes of the stock market (Ohiomu and Godfrey, 2011).
As a result, increasing the efficiency and effectiveness of these functions, as
well as the speed with which they execute their services, can boost economic
growth.
With the formation of the Nigerian Stock
Exchange (NSE) to strengthen the capital market, the necessity to attract
private money for growth was recognized early enough in Nigeria. The Nigeria
Stock Exchange was founded in 1960, and it was renamed the Nigerian Stock
Exchange Market (NSE) in 1977 after it was renamed the Lagos Stock Exchange
Market. It is a private, non-profit organization with a limited liability
company. It was founded thanks to the inspiration and assistance of business
leaders, as well as the federal government's Central Bank of Nigeria. The
Nigerian Stock Exchange is currently the largest in West Africa (NSE fact
sheet, 2018, 2014,). As of 2018, there are 171 listed stocks, 91 listed bonds,
and 9 listed exchange-traded funds (ETFs), with 166 firms from 11 industries
and a market capitalization of 21.904 trillion Naira. The stock market in
Nigeria was largely underutilized prior to the advent of the Structural
Adjustment Programme (SAP), with only a few Nigerians investing due to a lack
of information and disinterest. The stock market, on the other hand, has
developed dramatically since the economy was deregulated in 1986. According to
figures from the CBN statistical bulletin, the Nigerian stock market's market
value was 16.30 billion naira in 1990. In the year 2000, it reached 472.30
billion naira before peaking at almost 3.2 trillion naira in 2007. Many stock
markets around the world lost billions of dollars as a result of the financial
crisis of 2008. In 2008, Nigeria's market capitalization was around 9.5
trillion dollars. Market capitalization increased consistently during periods
of relative expansion, but decreased in 2016 when the economy entered
recession. The value was 21.9 trillion naira in 2018.
Fig.
1.1: Stock Market Capitalization in Billions
of Naira (1981-2018).
Source: CBN
Statistical bulletin 2018
During a stock market boom, share values rise
dramatically, and the stock market grows in prominence as a slew of new
entrants (mainly individual investors) flock to the market to take advantage of
the opportunities that trading in the market promises. The ease with which
investors can purchase and sell shares, depending on their valuation, allows them
to profit through arbitrage.
Invest in the market for end-of-financial-year
rewards, owing to the excellent reports presented by numerous companies each
year. From 2010 through 2018, the annual value of transactions on the floor of
the market (in millions) was 799 910, 638 925, 808 994, 2 350 875, 1 338 600,
978 047, 620 018, 1 078 491, and 1 284 976. Increased transaction volume on the
floor of the house has a significant impact on investment decisions and capital
formation in the economy.
Fig 1.2: Value of deals on the Nigerian stock exchange (1981-2018) (In
Millions of naira.
Source CBN statistical bulletin 2018.
Despite its long history of success, the
Nigerian stock market has faced some challenges, most notably: the country's
stock market is characterized by complications deriving from globalization
trends and the growing diversity of new instruments traded. They include equity
options, other derivatives, index futures, and so on. The global financial
crisis of 2008, as well as the most recent recession, which began in 2014 and
ended in 2017, aggravated the situation. All of these difficulties have
threatened to make the Nigerian capital market illiquid, resulting in a
downward trend in market indices.
(Udi and Ohwofasa 2018). The development and
growth of stock markets, as well as their importance for general economic
development, cannot be overstated in a developing nation like Nigeria. Despite
the market's small size and illiquid character, its continuous presence and
growth could have significant ramifications for economic activity. For example,
according to Pardy (1992), capital markets can mobilize domestic savings and
allocate funds more efficiently even in less developed countries. As a result,
the stock market may play a vital role in stimulating economic growth in a
developing economy like Nigeria by diverting investment to where it is most
needed. The allocation of such resources to diverse sectors undoubtedly aids
economic development and progress. According to Christopher (2006),
macroeconomic variables have the ability to affect investors' investment
decisions. This is backed by (Ikoku, 2007), who stated that investors believe
macroeconomic indicators and monetary policy have a significant impact on stock
prices, implying that macroeconomic indicators could create variances in share
returns and influence investor investment decisions. The Nigerian Stock
Exchange market may not be an exception, as macroeconomic shocks, which are
outside the jurisdiction of the capital market, are predicted to have an
impact. The volume and direction of movement in stock prices, market indexes,
and market liquidity typically reflect the changes.
1.2 STATEMENT OF THE PROBLEM
The Nigerian Stock Exchange Market, like many
other markets on the continent, has seen enormous changes in its market index
over the years, which have been linked to a variety of factors (Sundayson,
David and Hemen 2013). While some scholars suggest that only real macroeconomic
variables drive stock prices, others argue that both real and nominal variables
influence stock market behavior (Laichena and Obwogi, 2015). Macroeconomic
factors either help or hurt the stock market's performance, although the amount
and direction of these variables' effects on stock prices are highly argued.
Before the market meltdown in 2008, the stock market saw consistent rise in
volume of trade, value of shares traded, and the All Share Index beginning in
the early/mid 2000s (see SEC bulletins 2004-2008). This was especially visible
beginning with the bank consolidation policy in 2004 and the insurance sector
recapitalization mandate in 2005, when the Nigerian stock market's
capitalization surpassed N2 trillion for the first time since its creation.
Since 1995, the all-share price index, which measures stock market stability,
has risen gradually. It reached a high of more than 36,784.50 basis points in
2007 before plummeting in 2008. Between 2011 and 2015, the all-share index grew
steadily following the 2008 recession, reaching a new high of around 40,571.62
in 2015. As a result of the 2016 economic slump, the all-share price index
dipped in 2016, but has subsequently steadily risen to around 44,343.65 basis
points. In the year 2018,(2018 CBN Statistical Bulletin).
Fig. 1.3: All share index 1985-2018.
Source:
CBN Statistical Bulletin 2018.
The 2008 stock market crash and the 2016 stock
market decline in Nigeria demonstrate to the role of variables like
globalization and GDP growth in influencing stock market behavior.
In light of current findings, determining the
degree and direction of the association between these variables and stock
market performance becomes critical. The stock market's strength in depth as a
mobilizer of long-term financial resources is reflected in market
capitalisation as a percentage of GDP. According to data from CBN 2018, the
value of these variables has changed over time.
Between 1981 and 1994, the figure hovered
around 4% of GDP. It reached a high point in 2007 when it accounted for around
40% of GDP. Between 2008 and 2016, market capitalization as a percentage of GDP
dropped, and now stands at 18 percent of GDP in 2018.
Fig. 1.4: Market
Capitalization as a Percentage ofGDP. (1981- 2018).
Source: Authors
Computations using data from CBN.
Due
to this pivotal role played by the stock market in resource allocations in an
economy, the interaction between its performance and macroeconomic indicators
is increasingly being debated.
In
recent years, the performance of macroeconomic indicators in Nigeria has
remained poor. Presently, the situation has been exacerbated by the low price
of crude oil in the global market.
Key measures such as GDP growth have stayed
below 2% for the last three years, inflation is in double digits, and the
exchange rate is still much over the pre-2016 level (360/dollar). All of these
factors could potentially stifle the stock market's growth as well as its
ability to contribute to the economy's growth.
Owing
to the conflicting results identified in these Nigeria studies, it is clear
that the relationship between macroeconomic factors and stock market
performance in Nigeria remain unsettled (see Udi and Ahwofasa 2018). Thus, more
in-depth studies are needed to understand the macroeconomic variables that
might influence the performance of the Nigerian stock market. This study extends
the literature to address the question whether domestic macroeconomic variables
affect stock market index (proxy for stock price) within the context of a
developing economy. Emerging markets seem to have distinguished features from
those of the developed markets.
Furthermore, following the implementation of a
liberalization strategy, the capital market brings significant changes and
became more available to international investors. The Nigerian stock market is
drawing a big number of foreign institutional investors due to its reforming
market and significant economic potential. Those issues affecting stock market
performance, however, remained unsolved.
In Nigeria, for example, the interest rate has
stayed exceptionally high, with disastrous consequences for borrowing and
investment costs. Attracting foreign investment has been difficult because of
this. The instability of exchange rate leads to speculation in foreign exchange
market; disrupt international credit operations and the stock market
operations, while money supply has to be supported with growth in output of
goods and services in other not to draw stock prices downwards. Effects of
inflation rate also leads to decline in stock prices and among others.
Understanding the macroeconomic factors that could impact the stock market
index, with the recent data can be useful to investors, traders as well as the
policy makers.
The study will employ ARDL estimation
technique to investigate the long run and short run relationship between the
dependent variable (stock market development) and independent variables.
1.3 RESEARCH QUESTIONS
1. To what extent does macroeconomic
indicators influence the Nigeria Stock Exchange's performance in the short run?
2. What is the impact
of macroeconomic variables on the performance of the Nigerian Stock market in
the long run?
3. What is the direction of the causal
relationship between the Nigerian Stock Exchange Market's performance and the
selected macroeconomic indicators?
1.4 OBJECTIVES OF THE STUDY
The study's broad goal is to determine the
extent of the relationship between macroeconomic variables and the performance
of the Nigerian stock exchange market. The following are the specific
objectives:
1. To find out how the specified macroeconomic
indicators affect the performance of the Nigerian Stock Exchange Market in the
short run.
2. To determine how macroeconomic variables
affect the Nigerian Stock Exchange Market in the long run.
3. To
determine the direction of the causal link between the performance of the
Nigerian stock Exchange market and macroeconomic indicators.
1.5 RESEARCH HYPOTHESES
Ho1: Macroeconomic indicators
do not significantly influence
the performance of
the Nigerian Stock Exchange
Market in the short run.
Ho2: The
Nigeria Stock Exchange Market does not respond to shocks in the macroeconomic
indicator in the long run.
Ho3: There
is no causal link between macroeconomic indicators and the performance of the
Nigerian Stock Exchange Market.
1.6 SIGNIFICANCE OF THE STUDY
Since the stock market is a reliable source of
long-term capital, understanding the macroeconomic factors that affect stock
market returns, volatility, and the nature of their impact on overall market
performance will aid in risk management. The potency of macroeconomic policies'
influence in reducing risks in the market as a source of long-term capital
formation would thus be a criterion for their effectiveness. Investors, scholars,
stock market professionals, and stock market regulators all benefit from
evidence of the relationship between macroeconomic conditions and stock market
performance. It will not only aid in the development of a better understanding
of potential macroeconomic determinants of systematic financial sector risk,
but it may also aid in the refinement of stock pricing theories and the
forecasting of stock market volatility, allowing for more effective monitoring
and management of financial risks. This study will also result in an updated
literature, which will be useful to future scholars. As a result, academicians
and students would find it useful because it will add to the current literature
on the Nigeria Stock Exchange and act as a reference for students pursuing
study in this field. The study would also be useful for policymakers and other
players in the Nigerian economy to formulate and implement policies.
1.7 THE SCOPE OF THE STUDY
The relationship between the performance of
the Nigerian stock market and macroeconomic variables is the topic of this
research. The following are the exact variables that will be used in the study:
The Nigerian Stock Market All Share Index (ASI) will be used to proxy the
performance of the Nigerian Stock Market, while macroeconomic indicators
include the interest rate, real exchange rate, Gross Domestic Product (real
GDP), inflation rate (Consumer Price Index), broad money supply (M2), and
Standard and Poor's 500 stock index (S and P 500), which is a proxy for the
impact of foreign economic activities.
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