Vol. 4, No. 5, 2015, 312-317 Macroeconomics Variables and Stock Market Performance in Nigeria Gibson L.K. Daasi 1, Favour Amarachi Dimoji 2, Alobari Collins 3, Zukbee Sira 4 Abstract This study was motivated by the fact that macroeconomic variables could exert stocks on share returns and influence investors, investment digression which could be a motivation to investigate the relation between stock market performance and macroeconomic variables. The purpose of the paper therefore is to investigate the relationship between macroeconomic variables and stock market performance in Nigeria. Using data from Nigerian Stock Exchange fact books and Central Bank of Nigeria statistical bulletin which denote secondary data analysis, the effect of macroeconomic variable on stock market performance in Nigeria was examined. The regression results showed a strong relationship between macroeconomic variables and stock market performance in Nigeria. It thus becomes obvious that Nigeria stock market might be very sensitive to macroeconomic factors given the sizeable proper train of stock market capitalization as a share of the country s GDP. The paper draws policy implication for the findings and made useful recommendations at the end of the paper. Keywords: Macroeconomics, Variables, Stock Market, Performance, Market capitalization. 1. Introduction The Nigerian stock market equally known as the stock exchange operate in an emerging economy which is also undergoing rapid transformation and the forms. Macroeconomic characteristics that found in an emerging economy, most especially exchange rate fluctuations, interest rate uncertainties and inflationary trends of goods and services are bound to affect every aspect of the economy. The prevailing financial crisis and the sensitiveness of the capital market to external stock resulting from the global financial meltdown have affected the performance of the macroeconomic fundamentals in the economy with regards to the performance of Nigerian stock market. This situation gave impetus to Fama (1981) assertion that stock prices are the reflector or variables such as inflation, exchange rate, interest rate and industrial production. Hence, any development that could affect the stability of the economy usually has serious impacts on the performance of the stock market. The consistent decline in point by the Nigerian Stock Exchange (NSE) in recent times, which can be attributed to certain factors. And that is the preoccupation of the present paper. There is a vast research interest on the interaction of the capital market and the macroeconomic variables. This has sprung up the argument that stock prices or performance are determined by fundamental macroeconomic variables such as the interest rate, gross domestic product (GDP), exchange rate, inflation and money supply. This implies that investors generally believe that monetary policy and macroeconomic indicators have a large influence on the volatility of the stock prices. The macro variable and share returns controversies possess a deep concern for reflection on the theoretical assumption that macroeconomics variables are expected to impact on returns on equities, surprisingly studies on like Ibrahim and Aziz (2003), 1 Department of Banking and Finance, Rivers State Polytechnic Bori, Rivers State Nigeria. 2 Department of Business Administration and Management, School of Business and Management Technology, Abia State Polytechnic, Aba, Abia State, Nigeria. 3 Department of Banking and Finance, Rivers State Polytechnic Bori, Rivers State Nigeria. 4 Department of Banking and Finance, Rivers State Polytechnic Bori, Rivers State Nigeria. 2015 Research Academy of Social Sciences http://www.rassweb.com 312
Serkon (2008), Raza et al. (2011), Amadi and Odubo (2002) among others suggest a significant linkage between macroeconomic indicators and stock return in the various countries they studied. In a study carried out in Ghana using quarterly data from 1991-2007 by Adam and Twenebaah (2008) examined both the long run and short run dynamic relationship between the stock market index and the economic variable inward foreign direct investment, treasury bill rate, consumer price index, average oil prices and exchange rates using co-integration test. The result of the analysis is a significant indicator that macroeconomic variable can significantly impact on the Nigerian stock market performance, though the present study is set to test different macroeconomic variables. This is a pointer to the fact that macroeconomic variables could exert stocks on share returns and influence investors, investment digression which could be a motivation to investigate the relation between stock market performance and macroeconomic variables. Hence, the focus of the present study. The rest of the paper will be divided into sections. Section one will focus on the introduction/substantive reviews, section two covers methods and models, section three centers on results and discussion, section four covers the study conclusion and recommendation, the final section will focus on references. 2. Methods and Model Specification Using data from Nigerian Stock Exchange fact books and Central Bank of Nigeria statistical bulletin which denote secondary data analysis, the effect of macroeconomic variable on stock market performance in Nigeria was examined. The study adopted the multiple regression statistical technique. The study employed two economic models. Model 1: Macroeconomic variables and market capitalization model which is based on the functional model as specified below: MKCAP = f (EXCHR, INTR, INF, MS) Where: MKCAP = Market capitalization as proxy for stock market size EXHR = Exchange Rate INF = Inflation rate MS = Money supply The ordinary least regression model based on the function is MKCAP = br + b 1 EXHR + b 2 INTR + B 3 INF + MS + u. Model 2: Macroeconomic variable and stock price model Where: ASPI = All share price index. EXHR = Exchange rate INTR = Interest rate INF = Inflation MS = Money Supply The ordinary least square regression model based on the above function is: ASPI = br+ b 1 EXHR + b 2 INTR + b 3 INF + b 4 MS + ut. 313
3. Results and Discussions G. L. K. Daasi et al. Selected macro-economic variables and stock market performance indicators in Nigeria (1990-2012) will aid this analysis. This is shown in table 1 below: Table 1: Macro economic variables and stock market performance indicator in Nigeria (1990-2012) Year Mkcap Inf R Exch R MS Int. R 1990 220.0053046 56.47 9.001 68,662.6 25.50 1991 348.7697961 7.5 9.7545 87,499.8 20.01 1992 483.4759308 12.7 19.6609 129,085.5 29.86 1993 638.2313304 44.18 22.6309 198,479.2 18.32 1994 993.5256377 57.17 21.8861 266,944.9 21.00 1995 1981.185888 57.03 81.0228 318,763.5 26.18 1996 3092.498516 71.81 81.2528 370,333.5 26.18 1997 3966.712249 29.29 81.6494 429,731.3 12.54 1998 3134.6 10.67 92.3428 525,637.8 18.29 1999 3003.9 7.86 1000.8016 699,733.7 21.32 2000 4556.6 6.62 111.701 1,036,079.5 17.98 2001 7212.6 6.94 126.2577 1,315,869.1 18.29 2002 8323.3 18.87 134.0378 1,599,494.6 24.85 2003 11748.5 12.89 132.3704 1,985,191.8 20.71 2004 21701.85741 14.03 132.3704 2,263,587.8 19.18 2005 24801.58179 15.01 130.6016 2,814,846.1 17.95 2006 39300.4989 17.85 128.2796 4,027,901.7 17.26 2007 89904.56162 8.24 128.9701 5,809,826.5 16.94 2008 121802.2631 5.38 128.3124 9,166,835.3 15.14 2009 63556.42 11.6 130.243 10,780,627.1 18.99 2010 77919.63836 12.3 135.142 11,525,530.34 17.59 2011 89647.8 13.5 138.9 13,303,494.5 16.02 2012 89479.27122 14.2 148.9 15,342,653.70 15.78 Source: Central Bank of Nigeria Statistical Bulletin and Stock Market Book (various issues) A summary of the regression result for selected macro-economic variables and market capitalization are presented table 2 below. Table 2: Regression result for selected Macro economic variables and market capitalization Variables Coefficient Std Error t. statistic Probability MKCAP -5.625642 1.242628-4.527213 0.0003 INF. R -0.060796 0.085545 11.96346 0.0000 LOANS 1.023413 0.085545 11.96346 0.0000 EXCH. R 0.20217 0.152205 1.327568 0.2010 INT. RATE -0.039076 0.024070-2.623394 0.0219 R. SQUARE 0.984820 Mean dependent variable 6.142124 Adjusted r-square 0.331319 S.D dependent variable S. E of Regression 0.331319 Akaike info criterion 0.818190 Sum square reside 1.975902 Schwarz criterion 1.065037 Log likelihood -4.409189 Hannan-Quinn 0.880272 F-Statistic 291.9387 Durbin-Watson 1.997614 Prob. (F.statistic) 0.000000 314
From the above results, the following findings are discernable: a. The sign for the constraint term is negative and that provides no support to economy. The estimate shows that of the entire explanatory variable are (zero fixed, the growth rate marked capitalization will fall by s.62%. the estimate for inflation is also negative and does not conform to apriori economic cretin. The implication of this result is that all things being equal 1% increase in inflation rate will decrease market capitalization by 0.0607%. the sign of the parameter estimate for money supply is positive this is consistent with the apriori expectation indicating that an increase in money supply by 1% will lead to an increase in market capitalization by 1.6234% other things being equal. The estimate for exchange rate also has the hypothesized positive sign and collaborates with theirs. This result will imply that a 1% increase in this variable accelerate growth in market capitalization by 0.202% the parameter estimate for infest rate is as negatively related to market capitalization and this explains the negative sign for it. b. Still form the result above the coefficient of multiple determination (R 2 ) is 6.9848, this implies that the regression or the explanatory variables accounted for 98% of total variation in market capitalization and leaving just two percent 2% to the error term. Thus the regression lines fit the observation well. c. We also employed taunt or overall test of significant of all parameter estimates using the f-statistic. The test results show that the observed or calculated f-values is 291.93 and greater than its critical value of 2.39 at 5% levels of significance. This means that there exists a high degree of line relationship between the dependent variable and the independent variables in the model. d. We tested for statistical reliability of each parameter each parameter estimate using conventional students t-test from the result obtained three explanatory variables are statistically significant at 5% level of significance. These variables include inflation rate money supply and interest rate. The statistical significance of these variables is that t-statistic value calculated for inflation (2.41) money supply (11.96) and interest rate (2.6233) are all greater than the critical value of 2.1015% level of significance this means that these variables of significance in explaining short run variation in market capitalization in organza. e. The test for the existence of auto correlation was performed using Hucbin-Watsm statistic from the result obtained the H-W value of 1.9976 falls in the shaded region representing the region of no auto correlation thus it can be concluded that there is auto correlation among the variables in the model. Result of the selected macro economic variables and All-share price index model. A summary of the regression result is presented below LOGASPI = (0.4204) (4.3403) (2.2382) (3.2199) (1.29703) R-Squared = 0.963 Adjusted R 2 = 0.954 F-statistic = 110.82 Durbin-Watson = 1.735 0-5656 + 04789 MS - 0.01625 INF The results obtained from the above equation revealed that: a) The festinated regression him has a negative in percept, represented by the constant term indicating that holding all explanatory variable constant. All share price index will fall by for money supply is positive and this is consistent with themes indication that a 1% increase in money supply will lead to an increase in ASPI by 047%, all things being equal. The estimate for inflation rate is negative and does conform to economic criteria. The implication of this result is that all things being equal, a 19 increase in sate of inflation will lead to decline in ASPI by 0.016%. Exchange rate positively correlate with ASPI and this satisfy the apron economic criteria. It is common knowledge that an increase in exchange rate will push upward. 315
G. L. K. Daasi et al. Meanwhile, interest rate is negatively related to ASPI implying that a unit increase in interest rate will load to a fall in ASPI by 0.0378. b) Still from the result, R is 0.963 while adjusted R U 0.954. thus regression fit the observation well the influence of the explanatory variable is strong (969) compared to that of the error term 4%. c) In the test of overall significance of the model, it was evidence that calculated F (110.82) is greater than the critical level of 3.96 at 5% level of the significance; this affirmed the goodness of fit of the repressive. d) With regards to the statistical reliability of each parameter estimate the students t-test point to the fact that there are explanatory variables are statistically significant at 5% level of significance these variable include money supply inflation and exchange rate. Their calculated T-value are greater than the critical t- value at 5% level of significance. This means that these variables are significant in explaining short-run variations in ASPI 4. Discussion of Findings The study examined the effect of macroeconomic variables on stock market performance in Nigeria. The regression result proved that stock market performance id significantly determined by some fundamental macroeconomic variables such as interest rate inflation money exchange rate. This support shames (2008). Argument that stock market performance is largely determined by changes is macroeconomic variables in developing countries like Nigeria. The result of the study equally indicates that there is a negative relationship between inflation and market capitalization. This could be attributed to the fact that high rate of inflation as always in Nigeria increase the cost of living and a shift of resources from investment to consumption. This lead to full in demand for capital market instrument which lead to reduction in the volume of stock traded. Also, there is a negative relationship between interest rate and market capitalization as shown y the result. This is in line with the findings of Fifed (2010). High interest rate regimes lead to high cost of borrowing and have a reduction in economic activity. This also affects corporate profit cash flow of business and dividend. Therefore high interest rates are expected to be negatively related to stock market performance. Exchange rate was found to be positively related to stock market performance. This is in consonance with the findings of Pebbles and Lotion (2006). In recent years, all business is directly and indirectly affected by international activities as a result of globalization. In other words, exchange rate changes may affect the competitive position of companies and hence industries operations. Hence, exchange rate depreciation as always witnessed in Nigeria positively affects the performance of the stock market. 5. Conclusion The purpose of this study is to investigate the relationship between macroeconomic variables and stock market performance in Nigeria. The regression results showed a strong relationship between macroeconomic variables and stock market performance in Nigeria. It thus becomes obvious that Nigeria stock market might be very sensitive to macroeconomic factors given the sizeable proper train of stock market capitalization as a share of the country s GDP. 6. Recommendations Based on the result obtained, the following recommendations are made (1) Based on the study, inflation, money supply and exchange rate are key variables to be emphasized on by the government as a financial policy instrument in order to stabilize the stock market. 316
(2) Potential investors should pay more attention to inflation and exchange rate dynamics in their stock market investment decision. (3) The government of Nigeria need to be cautious in implementing exchange rate policies since they have direct rev on domestic stock market currency depreciation tends to result to growth in market capitalization. (4) In order to achieve stable exchange rates and maintaining low interest rates that could improve stock market performance in offering, monetary policy need to be very effective. References Aga, M. and Kocaman, B. (2006). An Empirical Investigation of the relationship between inflation, P/E ratios and stock price behavior using a new series called index- 20 for Istanbul Stock Exchange. International Research Journal of Finance and Economics, 6:133-165 Amadi, S. N. and Odubo, T. D. (2002) Macroeconomic Variables and Stock prices causality analysis.the Nigeria Journal of economics and management studies, 4 (1 and 2): 29-41 American Stock Association (2005). How much stock worth? From money<chimp.com http://www.ppcug.org/ CAISIG (retrieved on April 4, 2012). Billson, C., Brailsford, T. J. and Hooper, V. (1999).Selecting macroeconomic variables as explanatory factors of emerging stock market rectums.working paper series from http://ssrn.com/abstract-201908 (Retrieved on April 4, 2012. Central bank of Nigeria (1990-2012) Annual Reports and statements of accounts. Abuja: CBN. Maku O. E. and Atanda A. A. (2010). Determination of stock market performance in Nigeria: Long Run Analysis. Journal of management and organization behavior, 1 (3): 1-16 Udegbunam, R. I, Oaikhenan H. E. (2002). Fiscal Deficits, money stock growth and the behaviors of stock prices in Nigeria: an empirical investigation. Journal of financial management and analysis, 4 (1and2): 10-27 Federal Office of Statistics (1975-2005). Annual abstract of statistics, Nigeria. Abuja: FOS. Fama, E. (1981).Stock returns, real activity, inflation and money. American economics review, 71:545-565 Fama, E. (1990). Stock returns and expected returns and real activity. Journal of finance, 45 (4): 1089-1108. Iyoha, M. A. (2004). Macroeconomics: Theory and Policy. Benin City: Mindex Publishing Company. Raza, S. A., Raza, S. A., & Zia, A. (2011). Equity mutual funds performance in Pakistan: risk & return analysis. MPRA Paper No. 36804, University Library of Munich, Germany. 317