FINANCIAL OPENNESS, EXCHANGE RATE AND STOCK MARKET RETURNS IN NIGERIA
ABSTRACT
This study attempts to examine the impact of exchange rate and financial openness on stock market returns in Nigeria. The study employed annual time series data spanning the years 1985 to 2015. The methodology adopted for this study is the ordinary least square method (OLS).
In the model specification we regressed changes in stock market returns on changes in the independent variables of the model such as financial openness (FOPEN), exchange rate (EXRT) and real GDP (RGDP).
The results revealed a positive relationship between real GDP and financial openness on stock market returns and an inverse relationship between real GDP and stock market returns. Exchange rate and real GDP were both significant at 5% conventional level while financial openness was not statistically significant at 5% level.
This study suggests that there should be policy measure to ensure that inflows are coordinated into the Nigerian market and also government should put in place appropriate policy measures to ensure that the exchange rate is stabilized.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
a.    Background of the Study    -    -    -    -    -    
1.2 Statement of the Research Problem    -    -    -    
1.3 Research Questions    -    -    -    -    -    -    
1.4 Objectives of the Study    -    -    -    -    -    
1.5    Research Hypotheses    -    -    -    -    -    -    
1.6    Significance and Relevance of Study    -    -    -    
1.7 Scope of the Study    -    -    -    -    -    -    
   1.8 Limitation of the study    -    -    -    -    -    
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction    -    -    -    -    -    -    -    
2.2 Conceptual Literature    -    -    -    -    -    -    
2.3 Theoretical Review    -    -    -    -    -    -    
2.4 Empirical Literature    -    -    -    -    -    -    
CHAPTER THREE: METHODOLOGY
3.1 Introduction    -    -    -    -    -    -    -    
3.2 Research Design    -    -    -    -    -    -    
3.3The Population of the Study    -    -    -    -    -    
3.4       The Sample of the Study    -    -    -    -    
3.5    Model Specification    -    -    -    -    -    
3.6    Method of Data Analysis    -    -    -    -    -    
3.7       Sources of Data    -    -    -    -    -    -    
3.8    Operationalization of Variables    -    -    -    -    
CHAPTER FOUR: EMPIRCAL ANALYSIS
4.1 Introduction    -    -    -    -    -    -    -    
4.2 Correlation Analysis    -    -    -    -    -    -    
4.3 Regression Analysis    -    -    -    -    -    -    
CHAPTER FIVE: SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSION
5.1 Summary of Findings    -    -    -    -    -    -    
5.2 Recommendations    -    -    -    -    -    -    
5.3 Conclusion    -    -    -    -    -    -    -    
BIBLIOGRAPHY    -        -    -    -    -    
APPENDICES    -    -    -    -    -    -    -    
CHAPTER ONE
INTRODUCTION
1.1    Background to the Study
With the current trend of economic downturn facing several countries, there is a pressing need for nations to adopt liberalized policies regarding business and commerce. Financial openness is a move by government to encourage private investment from foreign nationals to be part of the domestic market of a country. Yu(2014) defined financial openness as the openness of a countries financial market to other countries, and allows them to carry out various financial transactions in its domestic markets. Financial Openness is also called Financial Market Openness and Financial transaction admittance. Financial openness is mostly often associated with higher rate of economic growth. Bekaert and Harvey (2000) show that financial openness reduces cost of capital, thereby inducing additional investment and temporary gave a response. This statement is viable not only for the adjudged results but it also stimulates inflow of foreign exchange and this in turn increases productivity and output in general. Financial openness has been one of the major stimulants of the economic boom of the Asian Tigers. Obstefelds (1994) posit that a simple mechanism for financial openness to affect productivity is that it improves allocative efficiency.
Exchange rate according to Investopedia is the price of a nation’s currency in terms of another currency.  That means the value of a domestic currency in terms of a foreign currency. Krugman and Obsterfeld (2006) defined Exchange rate as the quoted value of a foreign currency per unit of domestic currency or domestic currency per unit of foreign currency. Exchange rate of a particular country increases and decreases over time.
Stock market also known as stock exchange refers to the collection of markets and exchanges where the issuing and trading of equities (stock of publicly held companies), bonds and other sort of securities take place, either through formal exchanges or over the counter markets.(Investopedia, 2017).  The stock market is the most crucial equipment for a free market economy, because it provides companies with access to capital in exchange for giving investors a piece of ownership of a company. The stock market is mostly split into two: the primary market where new issues are sold through initial public offerings and the secondary market.
This study is an attempt to empirically investigate the relationship between financial openness, exchange rate and stock market return using Nigeria data set.
1.2    Statement of the Research Problem
From an economic point of view, the concept of financial openness has a far reaching impact on economic variables and stock market returns. The effect on exchange rate as pointed out by Krugman and Obsterfeld (2006) is that it determines the present value of the domestic country currency by giving foreign investors a measure of guarantee on investment. It is common knowledge that investors seek maximum returns on investment and no investor (foreign or domestic) would invest in markets with shaking policies. Taylor (1995) while studying the economics of exchange rate pointed out that financial openness has grown to be a key indicator of economic growth and development by being a measure of economic transparency.
            A lot of studies have been carried out on financial openness, exchange rate and Stock market return Osagie and Emeni (2015) examines the relationship between inflation rates, financial openness, exchange rates and stock market returns volatility in Nigeria. Using the ARCH and GARCH regression models they found out that inflation from previous periods affects stock market returns negatively. They also found out that financial openness and exchange rate does not affect do not have significant effect on stock market volatility. Ajao (2014) in examining the impact of inflation, financial openness and exchange rate on stock market volatility in Nigeria, and using the GARCH econometric model, finds that inflation, financial openness and exchange rate have impact on the stock market volatility with varying degrees. He concluded that high rate of fluctuations in previous period inflation and exchange rate would result in greater stock market volatility in the next period. Olweny and Omondi (2011) while investigating the effect of macro-economic factors on stock market return volatility, employed the EGARCH and GARCH econometric models to show that in Kenya the foreign exchange rate, interest rate and inflation rate affect stock market returns. The study of Pinjaman and Aralas (2015) on the dynamic stock returns volatility and macroeconomic factors in Malaysia also using the EGARCH econometric model obtained that inflation, exchange rate and economic growth are the major cause of fluctuations is stock market returns in Malaysia.
In this study, we shall extend Osagie and Emeni (2015) model by considering the effect of financial openness, exchange rates and gross domestic product on stock market returns volatility in Nigeria. There has been a lot of study such as Okonkwo et al (2014), Onakoya (2013) on the effect of stock market returns on GDP. However, we shall specifically investigate the relationship between financial openness, exchange rate and stock market returns in the Nigerian context. A study of this nature becomes necessary in view of the important nature of the two variables (financial openness, exchange rate) in relation to the stock market.
1.3        Research Questions
The study seeks to provide answers to the following research question;
i.    What is the relationship between financial openness and stock market returns in Nigeria?
ii.    What is the relationship between exchange rate and stock market returns?
iii.    Does real gross domestic product have any impact on stock market returns in Nigeria?
1.4            Objectives of the Study
          The objectives of the study are to;
i.     Determine the impact of financial openness on stock market returns in Nigeria.
ii.    Examine if there is any relationship between exchange rate and stock market returns in Nigeria.
iii.    Observe and analyze the effect of real gross domestic product on stock market returns.
1.5    Research Hypotheses
The following are the hypotheses of the study;
i.    There is no significant relationship between financial openness and stock market returns in Nigeria.
ii.     There is no relationship between exchange rate and stock market returns in Nigeria.
iii.     There is no significant effect of real gross domestic product on stock market returns in Nigeria.
1.6        Significance of the Study.
Empirical and theoretical studies have been carried out in the past by several researchers on the impact of financial openness of a country on the exchange on stock market returns. We shall be adding the effect of GDP to the foray to observe the effect on Stock market returns. This study is significant and unique and thus bridges the gap in various studies relating to the macroeconomic variables that affect stock market returns.
    Equally important, the outcome of the study will be of benefit to investors since fluctuations in inflation and stock market returns affect investment decisions, investors need to be able to predict these fluctuations to enable them achieve maximum returns on investment. Government should be able to regulate the money market by formulating appropriate policies to achieve a particular economic level. This can be obtained by knowing what variables to manipulate to obtain desired results.
    Policy makers in trying to come up with superior policies to drive economic growth and development have to understand the fluctuations of the stock market and how government can increase and decrease certain variables in the budget to attain that economic level.
    Researchers could expound on the subject matter to find out other variables that could affect the stock market returns and to ensure a stable and efficient stock market.
     This study is also expected to add to existing literature on factors affecting stock market returns, and should prove a valuable resource for knowledge for upcoming finance students.
1.7            Scope of the Study
This study would focus on the empirical relationship that exists between financial openness, stock market returns, gross domestic product, exchange rate and stock market returns in Nigeria. The empirical investigation shall be restricted to secondary data obtained from the Central Bank of Nigeria Statistical Bulletin and the Nigerian stock exchange facts book for the period of 30 years (1986 to 2015). The time frame was chosen because the period is long enough to observe any real pattern in variable movement over time.
1.8       Limitation of the study
    The main limitation of this study will be the reliability of data source from secondary sources which will determine the reliability of the result. Also considering the fact that it is an undergraduate study, the problem of time factor and heavy workload from other courses required for the session served as major limitations to this research.
    In addition to this, financial resources of the researchers are limited and this even more so in the case of student where lack of finance serves as a limitation to the study. Nevertheless, in spite of these challenges, the strength and accuracy of the overall outcome remain by and large unimpeded