Determinants of Stock Market Returns in Nigeria: A Time Series Analysis

Transcription

1 Deerminans of Sock Marke Reurns in Nigeria: A Time Series Analysis OSISANWO, Bukonla G. * ATANDA, Akinwande A. * [Corresponding Auhor], [Lecurer], Deparmen of Economics, Faculy of Social and Managemen Sciences, Olabisi Onabanjo Universiy, Ago-Iwoye, Ogun Sae, Nigeria], [osisanwo2000@yahoo.com], [ ]. [Sraegic R&D Uni, Daaric Research Consuling Inc., Nigeria], [daaricng@gmail.com] Osisanwo & Aanda. This is a research/review paper, disribued under he erms of he Creaive Commons Aribuion-Noncommercial 3.0 Unpored License hp://creaivecommons.org/licenses/by-nc/3.0/, permiing all noncommercial use, disribuion, and reproducion in any medium, provided he original work is properly cied. JournalsBank (2012). All Righs Reserved

2 Deerminans of Sock Marke Reurns in Nigeria: A Time Series Analysis Osisanwo, Bukonla G. & Aanda, Akinwande A. Absrac I is a known fac ha he marke liquidiy is an imporan aribue of sock marke developmen. Liquid markes essenially improve he mobilizaion and allocaion of capial and hereby enhance he prospecs of faciliy long-erm growh. This argumen sems he objecive of his sudy in analyzing he deerminans of sock marke reurns in Nigeria using he OLS mehod based on he sourced ime series variables from he Cenral Bank of Nigeria (CBN) beween 1984 and The findings indicaed ha ineres rae, previous sock reurn levels, money supply and exchange rae are he main deerminans of sock reurns in Nigeria. Therefore, his sudy proffer he need o adop a mixed policy approach beween capial and moneary marke insrumens in order o enhance he reurns in he Nigerian Sock Exchange. Keywords: Capial Marke, Sock Price, Macroeconomic indicaors, OLS, Nigeria Acknowledgmen Nil 478

3 I. Inroducion Over he pas years, Nigerian economy has been subjeced o series of social, poliical and economic policies and reforms. Before a decade afer independence, he counry was basically agrarian and he various regional governmens hen largely achieved food securiy. In 1961, he esablishmen of he Nigerian Sock Exchange (formally called Lagos Sock Exchange) promoed privae capial invesmen for growh and developmen in order o develop he capial marke. Pas and presen scholars believed ha invesmen ha promoes economic growh and developmen requires long erm funding, far longer han he duraion for which mos savers are willing o commi heir funds. In he capial marke, boh local and foreign invesors provide long-erm funds in exchange for long-erm financial asses offered by fund users. Ologunde (2006) said ha he marke embrace boh he new issues (primary) marke and secondary marke. Generally, capial markes are he hear bea of every economy since heir abiliy o respond insananeously o fundamenal problems change in all counries. Also, i encourages savings and real invesmen in any healhy economic environmen. Aggregae savings are channeled ino real invesmen which increases capial sock and herefore economic growh of he counry. These aribues of capial marke make i possible for he discerning minds o feed he impulse of such an economy. Nigeria Sock Exchange is no an exempion as i is expeced o be influenced by exernal shocks, which are ouside he realm of capial marke. The exernal shocks are he macroeconomic indicaors ha are expeced o cause Capial marke is a collecion of financial insiuions se up for he graning of medium and long-erm loans. I is a marke for governmen securiies, for corporae bonds, for he mobilizaion and uilizaion of long-erm funds for developmen he long-erm end of he financial sysem. Thus, i is a mechanism whereby economic uni desirous o inves heir surplus funds, inerac direcly or hrough financial inermediaries wih hose who wish o procure funds for he business. variaion in he sock prices movemen. Maku and Aanda (2009) argued ha hese changes are ofen refleced by he magniude and movemen in sock prices, marke index and liquidiy of he marke. Noneheless, i is a known fac ha he marke liquidiy is an imporan aribue of sock marke developmen. Liquid markes essenially improve he mobilizaion and allocaion of capial and hereby enhance he prospecs of faciliy long-erm growh. Indeed since liquidiy enables invesors o adjus quickly and wih minimal coss, i makes invesmens less risky (Omole, 1999.) The recen financial crisis has made he Nigerian capial marke illiquid and his has caused he downward rend in he marke. In urn, he capial is becoming less aracive o long-erm invesors and very risky o inves. The perceived risks associaed wih invesing in Nigeria marke are high. As a resul of he risk, foreign invesors are paronizing oher emerging markes even before he recen global financial meldown. Nigeria is he mos hi marke among oher capial markes in Africa like Johannesburg Sock Exchange (JSE) and Ghana Sock Exchange (GSE) because of is los in marke capializaion during his global financial crises ha have engulfed many economies of he world. The NSE capializaion has dropped by over N8.1 rillion from is peak of N13 rillion in 2008 when he financial urmoil sared spreading o emerging economies in he world, o he figure of N4.9rillion, which i closed a he end of 2009 (Business Day, 2009). In he las hree decades, ineracions beween capial marke and macroeconomic variables have been an issue among financial economiss and praciioners (Omole, 1999; Chrisopher Minsoo, Huahwa and Jun, 2006; Ikoku, 2007 and Maku and Aanda, 2009). They argued ha sock prices are deermined by some fundamenal macroeconomic variables such as he ineres rae, gross domesic produc (GDP), exchange rae, inflaion and money supply. Empirical evidences from he financial press 479

4 indicae ha invesors generally believe ha moneary policy and macroeconomic evens have a large influence on he volailiy of he sock price. Chrisopher e al (2006) opined ha macroeconomic variables can influence invenors invesmen decision and moivaes many researchers o invesigae he relaionships beween share reurns and macroeconomic variable. Favorable macroeconomic policies are expeced o impac posiively on marke and vice versa; which migh be insananeous, lagged or even anicipaory. Cenral auhoriies se macroeconomic performance arges every fiscal year and hese arges are usually ied o wo principal macro policy frameworks (fiscal and moneary). The regulaory agencies in he Nigeria have insiued numerous policies o sabilize he macroeconomic variables which had lile impac on he Nigerian capial marke. They are expeced o inerac o ensure ha governmen achieves is macroeconomic goals of general increase in oupu growh, promoing price sabiliy, sable exchange rae, employmen growh ec. The key macroeconomic indicaors are: GDP, inflaion rae, inerac rae (boh Treasury bill and lending rae), money supply and exchange rae are no he only deerminan of sock prices movemen. Oher facors (non-macroeconomic variables) ha affec he sock prices and he general rend of he marke are seasonal variaion, enlighmen of he invesmen public or general awareness of he marke, poliical and social crisis, invesmen moive, random behavior of invesors, new lising of securiies, individual invesor s objecive in he marke (speculaion or long-erm invesmen), company s earnings release and aciviies of he marke regulaor. The curren financial crisis and he capial marke sensiiveness o exernal shock resuling from he global financial meldown have affeced he performance of he macroeconomic fundamenals in he economy. The Nigerian economy has experienced mixed macroeconomic performance over he years. Similarly, he Nigerian Sock Exchange also have undergone series of reforms o measure up wih oher emerging markes in he world and increase he influx of foreign invesors. Maku and Aanda (2009) argued ha i is done o promoe he key secors of he economy, make he marke accessible for raising capial and aracive o boh foreign and local invesors. Following he fac ha macroeconomic variables have aken differen values over he years alongside he marke sock price index, can i be said ha here exiss any relaionship beween he key macroeconomic variables and sock marke index in Nigeria? On his basis, his research paper invesigaes he relaionship or co-inegraion beween he variable deerminans and sock marke performance in Nigeria as well as analyzes he force of macroeconomic shocks on her sock marke. The remaining secion of his sudy is divided ino four pars. Secion wo discusses heoreical framework and lieraure review. Secion hree depics he graphical rend analysis of exchange rae insabiliy and macroeconomic variables deerminans. Secion four highlighs he illusraive heoreical model employed o explain he variable deerminans of exchange rae volailiy in Nigeria. Secion five gives he empirical resuls and discussion of findings and he las secion would no only proffer policy recommendaions bu also conclude he sudy. II LITERATURE REVIEW AND THEORETICAL FOUNDATION 2.1 Lieraure Review The issue of causaliy beween macroeconomic variables and share reurns over he years have sem up conroversies among researchers based on varying findings. Theoreically, macroeconomic variable are expeced o affec reurns on equiies. Bu over he years he observed paern of he influence of macroeconomic variables (in signs and 480

5 magniude) on share reurns varies from one sudy o anoher in differen capial markes. Over he years, empirical findings by researchers sugges ha here is a significan linkage beween exernal shocks and sock reurn in he mos counries reviewed. In an elaborae search for he macroeconomic variables ha have effec on sock reurns, Chen, Roll and Ross (1986) idenified ineres rae, expeced and expeced raes of inflaion and he spread beween high and low-grade bond as he relevan variables. Chen, Roll and Ross (1986) es he mulifacor model in he Unied Sae of America by employing seven macroeconomic variables. They find ha consumpion, oil prices and he marke index are no priced by he financial marke. However, indusrial producion, changes in risk premium and wiss in he yield curve are found o be significan in explaining sock reurns. Miller and Modigliani (1961) used a differen approach in analyzing he heoreical basis for he pricing of he sock relaion o facors ha migh bring abou is flucuaion. Using he dividend model, sock reurns are expressed as he discouned value of expeced sream of each (dividend) flows. The sysemaic variables ha affec discoun facors and cash flows o companies will herefore influence reurns. Clare and Thomas (1994) invesigae he effec of 18 macroeconomic facors on sock reurns in he UK. They find oil price, reail price index, bank lending and corporae defaul risk o be imporan risk facors for he Unied Kingdom sock reurns. Mukherjee and Naka (1995) use vecor error correcion approach o model he relaionship beween Japanese sock reurn and macroeconomic variables. Coinegaion relaion is deeced among sock prices and he six macroeconomic variables, namely exchange rae, inflaion rae, money supply, money supply, real economic aciviy, long-erm governmen bond rae and call money rae. Furhermore, Know and Shin (1999) examines he role of macroeconomic variables in esimaing Korean sock prices. Sock indices seem o be coinegraed wih he combinaion wih he combinaion of he four macroeconomic variables namely rade balance, foreign exchange rae, indusrial producion and money supply. Ibrahim and Aziz (2003) invesigae he relaionship beween sock prices and indusrial producion, money supply, consumer price index, and exchange rae in Malayasia. Sock prices are found o share posiive long-erm relaionships wih indusrial producion and CPI. One he conrary, he found ha sock prices have a negaive associaion wih money supply and (Ringgis) exchange rae. Serkan Yilmaz (2008) invesigaes he role of macroeconomic facors in explaining Turkish sock reurns. He employed macroeconomic facor model from he period of July 1997 o June The macroeconomic variables consider are growh rae of indusrial producion index, change in consumer price index, growh rae of narrowly defined money supply, change in exchange rae, ineres rae, growh rae of inernaional crude oil prices and reurn on he MSCI World Equiy Index. He found ha exchange rae, ineres rae and world marke reurn seem o affec all of he porfolio reurns, while inflaion rae is significan for only hree of he welve porfolios. Also, indusrial producion, money supply and oil prices do no appear o have significan effec on sock reurns in Turkey. Kyereboah, Anhony and Agyire (2008) examined how macroeconomic indicaors affec he performance of Ghana sock marke using quarerly ime series daa covering he period of 19991o They found ha lending raes from deposi money banks have an adverse effec on sock marke performance and paricularly serve as major hindrance o business growh in Ghana. Inflaion rae was found o have a negaive effec on sock marke performance. Neverheless, aemp has been made by Nigerian researchers o invesigae he relaionship been macroeconomic variables and sock prices. Soyode (1993) made an aemp o es he associaion 481

6 beween sock prices and macroeconomic variables as exchange rae, inflaion and ineres rae. He found ha he macro economic variables are coinegraed wih sock prices are consequenly relaed o sock reurns. Amadi, Oneyema and Odubo (2000) employed muliple regression o esimae he funcional relaionship beween money supply, inflaion, ineres rae, exchange rae and sock prices. There sudy revealed ha he relaionship beween sock prices and he macroeconomic variables are consisen wih heoreical posulaion and empirical findings in some counries. Though, hey found ha he relaionship beween sock prices and inflaion does no agree wih some oher works done ouside Nigeria. Nwokoma (2002), aemps o esablish a long-run relaionship beween he sock marke and some of macroeconomic indicaors. His resul shows ha only indusrial producion and level of ineres raes, as represened by he 3-monh commercial bank deposi rae have a long-run relaionship wih he sock marke. He also found ha he Nigeria marke responds more o is pas prices han changes in he macroeconomic variables in he shor run. Ologunde, Elumilade and Asaolu (2006) examine he relaionships beween sock marke capializaion rae and ineres rae. They found ha prevailing ineres rae exers posiive influence on sock marke capializaion rae. They also found ha governmen developmen sock rae exers negaive influence on sock marke capializaion rae and prevailing ineres rae exers negaive influence on governmen developmen sock rae. Maku and Aanda (2009) examined he long-run and shor-run macroeconomic shocks effec on he Nigerian capial marke beween 1984 and They examined he properies of he ime series variables using he Augmened Dickey-Fuller (ADF) es and Error Correcion Model (ECM). However, he empirical analysis showed ha he NSE all share index is more responsive o changes in exchange rae, inflaion rae, money supply and real oupu. Therefore, all he incorporaed variables ha serve as proxies for exernal shock and oher macroeconomic indicaors have simulaneous significan impac on he Nigerian capial marke boh in he shor and long-run. 2.2 Theoreical Foundaion Financial Economic Theory One way of linking macroeconomics variables and sock marke reurns is hrough arbirage pricing (APT) (Ross, 1976), where muliple risk facors can explain asse reurns. While early empirical papers on APT focused on individual securiy reurns, i may also be used in an aggregae sock marke framework, where a change in a given macroeconomic variable could be seen as reflecing a change in an underlying sysemic risk facor influencing fuure reurns. Mos of he empirical sudies on APT heory, linking he sae of he macro-economy o sock marke reurns, are characerized by modeling a shor run relaionship beween macroeconomic variables and he sock price in erms of firs difference, assuming rend saionariy. An alernaive, bu no inconsisen approach is he discouned cash flow or presen value model (PVM). This model relaes he sock price o fuure expeced cash flows and he discoun rae of hese cash flows. Again, all macroeconomic facors ha influence fuure expeced cash flow or he discoun rae by which hese cash flows are discouned should have an influence on he sock price. The advanage of he PVM model is ha i can be used o focus on he long run relaionship beween he sock marke and macroeconomic variables. Campbell and Shiller (1988) he relaionship beween sock prices, earnings and expeced dividends. They find ha a long erm moving average of earnings esimae predic dividends and he raio of his earning variables o curren sock price is powerful in predicing sock reurns over several years. They conclude ha hese 482

7 facs make sock prices and reurns much oo volaile o accord wih a simple presen value model. Sock Prices Behaviour: Divergen Views There are five schools of hough on sock price behaviour. These are he fundamenalis schools, he echnical school, he random walk hypohesis school, he Bahavioural School of finance and macro-economic hypohesis school. The fundamenalis believe ha he value of a corporaion s sock is deermined by expecaions regarding fuure earnings and by he rae a which hose earnings are discouned. The fundamenaliss apply presen value principles o he valuaion of corporae sock, using dividends, earnings, asses and ineres rae o esablish he price of sock. The echnical school opposes he fundamenaliss argumens, and claims ha sock price behaviour can be prediced by he use of financial or economic daa. They submi ha sock prices end o follow definie paern and each price is influenced by preceding prices, and ha successive prices depend on each oher. According o Smih (1990), echnical analyss engage hemselves in sudying changes in marke prices, he volume of rading and invesors aiude. Boh he echnical and fundamenal analyses have been challenged by scholars who subscribe o he random-walk hypohesis, which sees sock price movemens in erms of a probabiliy disribuion of differen possible oucome. The random-walk hypohesis is based on efficien marke assumpion ha invesors adjus securiy rapidly o reflec he effec of new informaion. Believers in he efficien capial marke hypohesis argue ha sock prices are essenially random and herefore, here is no chance for profiable speculaion in he sock marke. An ineresing feaure of random walk is he persisence of random shocks. Empirical es of he randomwalk hypohesis have been carried ou by scholars like Moore (1962) and Fama (1965). These scholars independenly esed he saisical randomness of successive changes in sock prices. Their findings showed insignifican deparures from randomness and were boh inconclusive and insufficien. The behavioural school of finance holds ha marke migh fail o reflec economic fundamenals under hree condiions. When all hree apply, he heory predics ha pricing biases in financial markes can be boh significan and persisen. The firs behavioural condiion is irraional behaviour. I holds ha invesors behave irraionally when hey don correcly process all he available informaion while forming heir expecaions of a company s fuure performance. The second is sysemaic paerns of behaviour, which hold ha even if individual invesors decided o buy or sell wihou consuling economic fundamenals, he impac on share prices would be limied. Lasly, limis o arbirage in financial markes ascerain ha when invesors assume ha a company s recen srong performance alone is an indicaion of fuure performance; hey may sar bidding for shares and drive up he price. Some invesors migh expec a company ha surprises he marke in one quarer o go on exceeding expecaions (Business Day, 2009). The usual mehod of using facor analysis approach o deermine he facors affecing asse reurns, some scholars have measured macroeconomic facors o explain sock reurn Sweeney and Warga (1986) found ha changes in ineres rae are associaed wih risk premia. They inerpreed he observaion o be a reflecion of changes in he rae of inflaion, given he finding of Fama (1977) ha changes in he rae of inflaion are fully refleced in ineres raes (Emenuga, 1994). The macroeconomic approach aemps o examine he sensiiviy of sock prices o changes in macroeconomic variables. The approach posis ha sock prices are influenced by changes in money supply, ineres rae, inflaion and oher macroeconomic indicaors. I employs a general equilibrium approach, sressing he inerrelaions 483

8 beween secors as cenral o he undersanding of he persisence and co-movemen of macroeconomic ime series, based on he economic logic, which suggess ha everyhing does depend on everyhing else. Figure 1: Time series plo of NSE All share index III Trend Analysis of Macroeconomic Indicaors and Marke Shares Index in Nigeria The rend analysis ha shows he ineracion beween macroeconomic indicaors and Nigerian Sock Exchange (NSE) all share index is presened in his sub-secion. The ime series plo of he incorporaed macroeconomic indicaors and NSE all share index are presened in figure 1 o 4. The secondary daa used in he rend analysis of he ineracion beween se of macroeconomic variables and he Nigerian Sock Exchange all share index as a proxy of sock marke performance are sourced from he Cenral Bank Saisical Bullein and Nigerian Sock Exchange Facbook of several issues. The ime series daa sourced are Nigerian Sock Exchange (NSE) all share index (NSEDX) as measure of sock marke volailiy in his sudy, while he incorporaed se of macroeconomic indicaors sourced are exchange rae of naira o a dollar (EXC), consumer price index as measure of inflaion rae (CPI), ineres rae (INT), broad money supply (M2) ha indicaes he availabiliy of abundan money, and real per capia income (RCPI) ha measures he sandard of living of he invesor. Figure 2: Time series plo of Real Per Capia Income The ime series plo in figure 1 shows he Nigerian Sock Exchange (NSE) all share index rend and revealed ha he series moves wihin a fixed bound beween 1984 and 1992, afer i sared being rendy ill Alhough, he insignifican falls are winessed beween 2007 and 2010 due o he global financial meldown ha engulfed he Nigerian capial marke. 484

9 Figure 3: Time series plo of Broad Money Supply was rendy during he global financial urmoil. However, he figure 4 presened he ime series plo of consumer price index ha measures he inflaionary level in he economy and ineres rae series. The figure 4 revealed ha he series, consumer price index and ineres rae exhibi a random disribuion paern i.e. he series does no mainained consisen rend beween 1984 and METHODOLOGY 3.1 Inroducion Figure 4: Time series plo of Consumer Price Index and Ineres rae The figure 2 shows ha he real per capia income series mainained a consisen paern over ime beween 1984 and While, he broad money supply series presened in figure 3 likewise exhibi he same rend paern like he NSE all share index series excluding ha he series was consisen all hrough he review. This indicaes ha even during he global financial crisis, he broad money supply This secion of his sudy presens he mehodological descripion for he analysis o examine he relaionship beween sock marke performance and is variable deerminans in he Nigerian sock marke beween 1970 and The ime frame is chosen o cover he eras of economic programmes in Nigeria, like he Pre Srucural Adjusmen Programme (SAP), Srucural Adjusmen Programme (SAP), Pos-Srucural Adjusmen Programme (Pos-SAP). In order, o achieve he research objecive precisely, his secion of he sudy focused on he model descripion of he mehodology employed for deailed economeric analysis. 3.2 Model Specificaion In examining he precise impac of variable deerminans on sock performance in he Nigerian sock exchange marke, he empirical model employed by Maku and Aanda (2009) is adoped and modified o achieve he specific objecives of he sudy. The economeric model employed by Maku and Aanda (2009) in analyzing he shock effec of macroeconomic indicaors on he Nigerian Capial marke is expressed as: LNSEDX = η + η LEXC + η LCPI + η LTBR η4lm 2 + η5lrgdp + u (1) In heir work, hey proxy Nigerian sock marke as NSE all share index and macroeconomic variables are proxy as exchange rae (EXR),

10 consumer price index (PCI), reasury bill rae (TBR), broad money supply (M2) and real Gross Domesic Produc (GDP). Therefore, he economeric model employed by Maku and Aanda (2009) is adoped and modified by changing reasury bill rae o lending rae which is he mos significan money marke rae, and while real Per Capia Income (PCI) is incorporaed raher han real gross domesic produc. Therefore, he economeric model ha incorporaes he relaionship beween macroeconomic indicaors and sock marke reurns in Nigeria for his sudy based on he adoped model ** is specified as: β + β1lexc + β2cpi + β3int + β4m (2) Where: LNSEDX = Log of NSE all share index; LEXC= log of Official Exchange rae (#1=$) CPI= percenage change in Consumer Price Index i.e. inflaion rae. INT= Ineres Rae i.e. Lending rae M 2 g= Annual growh rae of Broad money supply RPCIg= Annual growh rae of Real Per capia income ß 0 = Inercep ß 1-5 = slope of he explanaory variables u = Sochasic or error erm. The incorporaed variables are ransformed in erms of uni of measuremen o avoid mulicollineariy and misspecificaion error in he specified model (2). The specificaion of he model is o esablish he relaionship beween sock prices, which invariably conains full informaion abou he enire sock marke operaing environmen and some key macroeconomic variables. The inclusion of hese LNSEDX par of RPCIg he empirical + u evidence. = 0 2g + β5 variables derives from he lieraure on oher sock markes (Chen, Roll and Ross, 1986). The inclusion of exchange rae, ineres rae (lending rae), money supply, and GDP per capia are suppored by he observed relaionship beween hese variables and sock prices in Nigeria (Omole, 1999). There is ye o be a heoreical consensus on heir signs (Chen, Roll and Ross, 1986). 3.3 A Priori Expecaion The apriori expecaion provides expeced signs and significance of he values of he coefficien of he parameers under review on he In Nigeria, he level of money supply has been on he increase over he years, implying ha since money supply has negaive relaionship wih ineres raes, hen sock prices would be expeced o grow wih he level of money supply. Also, ineres raes and inflaion are expeced o have a negaive impac on sock prices, and a posiive relaionship is expeced beween real GDP per capia income and sock prices. A depreciaing Naira exchange rae is expeced o increase sock prices as noed by Amadi e al (2000). 3.5 Economeric Mehod, Naure and Sources of Daa The specified linear regression model is esimaed using he ordinary leas square (OLS) mehod. The sudy made use of secondary daa. The daa were sourced from he Saisical Bullein of he Cenral Bank of Nigeria (CBN), Annual Absracs of Saisics of he Naional Bureau of saisics (NBS) and he Nigeria Sock Exchange (NSE) fac book. ** Prior o he adaped model specificaion, several ieraions were carried based on number of lags, auoregressive erms and variables ransformaion in order o have a srucurally sable model. The resuls of he regression ieraions were repored a he Appendix for comparison. 486

11 4.0 EMPIRICAL ANALYSIS effec of incorporaed macroeconomic facors for he 4.1 Inroducion This secion deals wih he economeric analysis of he sudy. The able 4.2 repors ha changes in exchange rae (LEXC), and consumer analysis of he macroeconomic deerminans of he price index (CPI) exer posiive effecs on sock performance of he sock marke in Nigeria beween marke performance in Nigeria beween he 1984 and The ime frame covers he incepion of Nigerian Sock Exchange (NSE) All-Share index compuaion in Nigeria which measures marke volailiy, hrough he period he capial marke winessed massive deerioraing down fall due o he global financial crisis ha sared in he Unied Sae as a resul of he sub-prime morgage crisis. This secion also covers presenaion of daa, esimaion and inerpreaion of he specified empirical model hrough he use of E-Views 7.1. incepion of NSE all share index compuaion and 2010 fiscal year and all of hese effecs conform wih he heoreical expecaions excluding he effec of inflaion rae which is expeced o exer negaive effec on changes in NSE all share index based on sign. In erms of magniude of effec, a uni increase change in exchange rae of naira vis-à-vis U.S dollar (LEXC) and percenage increase in changes in consumer price index (CPI) will enhance 4.2 Empirical Resuls he performance of he Nigerian Sock Exchange The resul obained from he esimaion (NSE) by basis poins and 0.003% oupu of E-View 7.1 for he empirical model a is respecively. ransformed variables form is presened in able Also, oher incorporaed deerminans of 4.2. sock marke performance, ineres rae (INT), The specified model formulaed o capure he effec of macroeconomic indicaors-exchange rae, per capia income, and ineres rae-on sock marke reurn is expressed as: growh of broad money supply (M2g) and real per capia income (RPCIg) growh rae were found o reard he performance of Nigerian sock marke beween 1984 and None of hese are in LNSEDX β + β LEXC + β CPI + β INT + β M andem RPCIg wih + he u apriori expecaions excluding = g + β5 money marke ineres rae. When he money marke The esimaed model based on he resul presened in able 4.2 is given as: ineres rae guaranees higher reurns his will increase he demand for money marke insrumens LNSEDX = LEXC CPI 0.066INT and caused 0.001Mdownward 2g 029pressure RPCIg on he changes in The esimaed resul for he muliple parameers regression specified o capure he effec of macroeconomic shocks on he sock exchange proxy as he NSE all share index in Nigeria beween 1984 and 2010 presened in able 4.2 revealed he Prior o he adaped model specificaion, several ieraions were carried based on number of lags, auoregressive erms and variables ransformaion in order o have a srucurally sable model. The resuls of he regression ieraions were repored a he Appendix for comparison. 487 NSE all share index. The resul furher revealed ha percenage change in prime lending rae, money in circulaion, and real per capia income, he Nigerian All Share Index as a measure of sock marke performance decline by 0.066%, 0.001% and 0.029% respecively. In assessing he parial significance of he esimaed parameers for he incorporaed macroeconomic indicaors, he -saisics resuls are presened in he able 4.2. The resul shows ha he esimaed parameer for changes in exchange rae (LEXC) and ineres rae (INT) were found o be parially saisically significan a 5% criical level because heir p-values are less han While, he

12 esimaed parameers for he consumer price index (CPI), broad money supply growh rae (M2g) and real per capia income (RPCIg) growh rae were found parially insignifican a boh 5% and 10% criical level. Alhough, he F-saisic resul shows ha all he se of macroeconomic indicaors ha posed shocks-(i.e. he log of exchange rae (LEXC), consumer price index (CPI), ineres rae (INT), broad money supply (M2g) growh rae and real per capia income (RPCIg) growh rae)-incorporaed are simulaneously significan a 5% criical level. While, he adjused R-squared resul reveals ha 91% of he oal variaion in he Nigerian Sock Exchange (NSE) all share index as a measure of sock performance is accouned by changes in exchange rae (LEXC), consumer price index (CPI), ineres rae (INT), broad money supply (M2g) growh rae and real per capia income (RPCIg) growh rae during he review period. The Durbin- Wason es resul reveals ha here is presence of posiive serial correlaion among he residuals, because of he d-value ( ) is far from zero bu close o wo. Table 4.2: Esimaed Regression Resul Dependen Variable: LNSEDX Mehod: Leas Squares Sample: Included observaions: 26 Variable Coefficien Sd. Error -Saisic Prob. C LEXC CPI INT M2g RPCIg R-squared F-saisic Adjused R-squared Prob(F-saisic) Durbin-Wason sa S.E. of regression Source: Exraced from he appendix 5.0 Conclusion and Recommendaion 5.1 Conclusion Emanaing from he research findings, i can be deduced ha exernal shock and oher macroeconomic variables dicaes he movemen of sock marke prices performance and volailiy, and some of hese key variables are he significan deerminans of he sock marke performance in Nigeria during he reviewed period. Specifically, he changes in exchange rae of naira vis-à-vis U.s dollar (LEXC) and ineres rae (INT) were found o exer significan impac on he growh of he Nigerian Sock Exchange all share index beween 1984 and On he basis of he F-Saisic resul, his sudy rejecs he null hypohesis sock marke performance has no significan relaionship wih is deerminan variables in he Nigerian sock marke a 5% significance. Therefore, concludes ha specific exernal shocks and macroeconomic indicaors are significan deerminans of sock 488

13 marke performance in Nigeria. However, he precise link or causaliy beween macroeconomic indicaors and sock marke performance is no ye known from his sudy and his will serve as a gap o be filled for oher fuure sudies on Nigerian sock marke. Our economeric evidence is also in line wih he findings of scholars reviewed in chaper wo like Ologunde e.al (2006); Soyode (1993); Akinifesi (1987), Amadi e al. (2000), and Maku and Aanda (2009). 5.2 Recommendaions The following policy opions are recommended o bring abou enhanced sock marke performance amids macroeconomic flucuaions and exernal forces: i. The governmen should fine urned he exchange rae policy and insiue a consisen policy plan o mobilize surplus funds from abroad, which would be injeced ino he capial marke for significan developmen. ii. The sandard of living of he ciizens as measured by Per Capial Income (PCI) should be increased by providing essenial infrasrucural communiy faciliies in order o increase he abiliy of he people o inves in he Nigerian capial marke. iii. I is desirable for reurns on equiies o be inflaion hedge. For Nigerian equiies o have his propery, we recommend full deregulaion of he enire price formaion process in he capial marke. iv. The governmen and he securiies exchange commission (SEC) should creae a special fund called sabilizaion securiies fund o sabilize he marke in he presence of exernal shocks. This o make he marke aracive o proposed, exising and foreign invesors. v. Considering he level of process of he Nigerian capial marke, o exernal shock he concerned auhoriies should insiue policies and mechanism ha will sabilize significan macroeconomic indicaors in order o promoe he capial marke. 489

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17 Esimaion a Absolue Level Dependen Variable: NSEDX Mehod: Leas Squares Dae: 06/06/12 Time: 17:10 Sample: Included observaions: 27 RESULT APPENDIX Variable Coefficien Sd. Error -Saisic Prob. C EXC CPI INT M RPCI R-squared Mean dependen var Adjused R-squared S.D. dependen var S.E. of regression Akaike info crierion Sum squared resid 1.42E+09 Schwarz crierion Log likelihood Hannan-Quinn crier F-saisic Durbin-Wason sa Prob(F-saisic) The magniudes of he coefficiens of he explanaory variables are oo large due differenial measuremen of he incorporaed variables. Also, he repored sandard error of regression is large reflecing presence of mulicolineariy and heeroskedasiciy. Therefore, he model is srucurally no sable o explain he deerminans of sock marke performance in Nigeria. 493

18 Esimaion of Double Log Model Dependen Variable: LOG(NSEDX) Mehod: Leas Squares Dae: 06/06/12 Time: 17:20 Sample (adjused): Included observaions: 26 afer adjusmens Variable Coefficien Sd. Error -Saisic Prob. C LOG(EXC) CPI INT M2GR RPCIG R-squared Mean dependen var Adjused R-squared S.D. dependen var S.E. of regression Akaike info crierion Sum squared resid Schwarz crierion Log likelihood Hannan-Quinn crier F-saisic Durbin-Wason sa Prob(F-saisic) The esimaed model repored a low sandard error of regression which ends no o influence he level of -saisics and overesimae he adjused R 2. This esimaed model is preferred o he below repored model because all explanaory variables are esimaed a heir growh rae level excluding exchange rae which is logged. 494

19 Dependen Variable: LOG(NSEDX) Mehod: Leas Squares Dae: 06/06/12 Time: 17:17 Sample (adjused): Included observaions: 26 afer adjusmens Variable Coefficien Sd. Error -Saisic Prob. C LOG(EXC) CPI INT M2GR LOG(RPCI) R-squared Mean dependen var Adjused R-squared S.D. dependen var S.E. of regression Akaike info crierion Sum squared resid Schwarz crierion Log likelihood Hannan-Quinn crier F-saisic Durbin-Wason sa Prob(F-saisic) Auoregressive Models Dependen Variable: LOG(NSEDX) Mehod: Leas Squares Dae: 06/06/12 Time: 17:07 Sample (adjused): Included observaions: 26 afer adjusmens Convergence achieved afer 23 ieraions Variable Coefficien Sd. Error -Saisic Prob. C LOG(EXC) LOG(CPI) LOG(INT) LOG(M2) LOG(RPCI) AR(1) R-squared Mean dependen var Adjused R-squared S.D. dependen var S.E. of regression Akaike info crierion Sum squared resid Schwarz crierion Log likelihood Hannan-Quinn crier F-saisic Durbin-Wason sa Prob(F-saisic) Invered AR Roos.92 Dependen Variable: LOG(NSEDX) Mehod: Leas Squares Dae: 06/06/12 Time: 17:08 495

20 Sample (adjused): Included observaions: 25 afer adjusmens Convergence achieved afer 21 ieraions Variable Coefficien Sd. Error -Saisic Prob. C LOG(EXC) LOG(CPI) LOG(INT) LOG(M2) LOG(RPCI) AR(1) AR(2) R-squared Mean dependen var Adjused R-squared S.D. dependen var S.E. of regression Akaike info crierion Sum squared resid Schwarz crierion Log likelihood Hannan-Quinn crier F-saisic Durbin-Wason sa Prob(F-saisic) Invered AR Roos The auoregressive models [AR(1)] and [AR(2)] were found o repor low sandard errors of regression and have invered AR roo wihin he uni modulus. This implies ha he auoregressive models are srucurally sable bu none of he incorporaed deerminans were found significan which migh be a resul of he presence of inconsisen variances over ime i.e. heeroskedasiciy ha caused he low sandard error. 496