MACROECONOMIC DETERMINANTS OF STOCK PRICES BEHAVIOUR IN NIGERIA
ABSTRACT
The study investigates in an empirical pattern, the macroeconomic determinants of stock prices in Nigeria, using a time series estimation technique, essentially, the Granger Causality testing and the cointegration and error correction methods. Moreover, quarterly time series data was used in the estimation.
              Results from the empirical analysis show that the level of income and general economic performance are the greatest determinant of stock price changes both in the short run and in the long run. Real income seemed to slow down stock prices in the short run while it stimulates the prices in the long run. Money supply has a high positive effect on stock price changes especially in the short run, the naira exchange rate also has a strong positive impact on the changes in stock prices, interest rate has a strong negative impact on stock price changes while  inflation does not have a significant effect on changes in stock prices. But a strong reverse causality exists between stock prices and money supply as well as real income level. When stock prices change, money supply tends to change significantly. This shows a monetary transmission channel that includes the stock market in Nigeria.
    The study recommends among others that investors should not base their investment decisions in the market only on macroeconomic variables. In fact, the result indicates that stock return is the most significant factor in determining stock prices, investor should seek ways to balance his approach to market watching by combining economic factors with core market indicators in order to maximize returns.
          TABLE OF CONTENT
CHAPTER ONE
INTRODUCTION
1.1    Backgrounds to the Study
1.2    Statement of the Research Problem ….  .
1.3    Objectives of the Study
1.4    Research Hypotheses      
1.5    Scope of the Study
1.6    Significance of the Study  
1.7    Limitations to the Study
CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.1    Preamble       
2.2    Theories of Stock Price Behaviour
2.3    Theoretical Framework
2.4    Brief overview of the Nigerian Capital Market
2.5    Interest rate and stock prices
2.6    Inflation rate and stock prices
2.7    Money supply and stock prices
2.8    The effect of exchange rate on stock market
2.9    The link between stock prices and the economy/GDP
2.10    Empirical evidence around the world
CHAPTER THREE
METHODOLOGY OF THE STUDY
3.1    Introduction..…
3.2    Sources of Data………….
3.3    Model Specification
3.4    Method of data analysis…………
CHAPTER FOUR
EMPIRICAL ANALYSIS
4.1    Introduction...
4.2    Unit root test
4.3    Cointegration analysis
4.4    Granger causality test
4.5    The Error correction mechanism (ECM) (Short-run analysis)
4.6    The long-run relationship
4.7    Discussion of findings
 CHAPTER FIVE
SUMMARY OF FINDINGS, RECOMMENDATIONS AND
 CONCLUSIONS…
5.1    Introduction
5.2    Summary of findings
5.3    Recommendations
5.4    Conclusion
BIBLIOGRAPHY…
APPENDICE
LIST OF TABLES
 4.1    Unit root test for variables in levels
4.2    Unit root test for variables in first difference
4.3    Results of Engle and Granger residual based cointegration tests
4.4    Pairwise Granger causality tests
4.5    The short-run dynamic model for macroeconomic determinants of stock Prices
4.6    The long-run relationship between macroeconomic factors and stock Prices
CHAPTER ONE
INTRODUCTION
1.1    BACKGROUND TO THE STUDY
    The investment process in any country provides opportunity for companies to finance their operations and thus ensure that they do not go bankrupt due to paucity of fund (Inegbedion, 2008). But investors’ preference for the shares of a company is a function of stock price behaviour. This underscores the need to study the behaviour of share prices. Furthermore, investors seek to analyse securities thoroughly, with a view to establishing the basis for efficient allocation of resources. It is believed that thorough security analysis will predispose the investors to make adequate decision regarding the appropriate security or securities to invest in, with a view to maximizing their returns. Nevertheless, the ability of the investor to enhance his/her earnings through security analysis is a function of the nature of the capital market in which he/she operates. The capital market is an integral component of the financial system of any country. It is a market for medium to long-term funds for investment, which means it provides opportunities for investors to invest their funds.
    According to Al-Faki (2006), the capital market is a network of specialised financial institutions, series of mechanisms, processes and infrastructure that, in various ways, facilitate the bringing together of suppliers and users of medium to long-term capital for investment in socio-economic development projects. Osaze (2000) defines it as a network of institutions and mechanisms existing for the mobilization and exchange of long and medium term funds in the form of shares, bonds and derivatives. On his part, Dauda (2006) defines the capital market as consisting of the network of institutions and mechanisms through which intermediate and long-term funds are pooled together and made available to businesses, governments and individuals. Consequently, the capital market is the pivot upon which any economy revolves especially as regards its role of creating, mobilizing and rationing long-term funds for economic growth and development. Thus, whether an economy develops or not depends, among other things, on the existence of a capital market or the extent of development of the existing capital market and its ability to fund regenerative investments that are self-sustaining (Osaze, 2006). The traditional view of the Stock Exchange used to be that the stock market was the hand maiden of the industry. However, this view has long given way to a modern perception that the industry is the handmaiden of the capital market (Odife, 2002). This explains why any study on the workings of the capital market such as stock price behaviour, is worthwhile because stock prices are important indicators of the workings of the capital market. Stability or volatility of stock prices have implications on the confidence of the investing public because investors’ motive of investing in shares is to be able, at least, earn a fair return. To this end, policy makers in government and regulatory authorities of the capital market must do everything possible to ensure that fluctuations in stock prices are put under control so that the stock market is not exposed to jeopardy that may prove catastrophic. In so doing, there is the need to identify major determinants with a view to ensuring that policies which affect these variables are not formulated in a manner that will stimulate adverse effects on stock prices; as such will be inimical to the objectives of the capital market. It can be conjectured that stock price changes have implications for the level of vibrancy of the capital market and by implication economic development. This underscores the importance of the problem definition of this study.   
1.2    STATEMENT OF THE RESEARCH PROBLEM    
    Changes in stock prices and the pattern of changes is of particular importance to investors and security analysts. Empirical studies abound which seek to ascertain the pattern of stock price changes and the factors that are mainly responsible for such changes (Inegbedion, 2008). Some analysts are of the opinion that stock prices are one of the best indicators of changes in economic activities (Aisein, 2007). Owing to the importance of stock price behaviour to the investing public and capital market participants, security analysis has become a major practice among speculators and some other market participants. The essence of security analysis is to advice the investors on how to make purchasing decision that will assist them to optimise the returns from their investment. If a market is not efficient, then it is possible to beat the market (gain permanent advantage over other investors) either through priviledged information or through a study of the systematic behaviour of stock price movements. Despite the relevance of the capital market to economic development, it appears that the market is not receiving adequate attention from stakeholders in Nigeria. This probably explains why there are scanty studies that seek to link stock price changes to economic development. The intention of this therefore, is to determine the major factors that influence stock price movement as well as the extent to which these factors affect stock price movement and, hence, have a proper understanding of the pattern of stock price behaviour in the Nigerian capital market.
    Specifically, this study seeks to provide answers to the following questions:
1.    What is the relationship between stock price movement and interest rate?
2.    What is the relationship between stock price movement and Money supply?
3.    What is the relationship between stock price movement and inflation rate?
4.    What is the relationship between stock price movement and exchange rate?
5.    What is the relationship between stock price movement and GDP?  
1.3    OBJECTIVES OF THE STUDY
    The main objective of the study is to determine the macroeconomic determinants of stock price movement in the Nigerian capital market. Specifically, the study seeks to determine the impact of interest rate, Money supply, inflation rate, exchange rate and GDP on stock price behaviour within the context of the Nigerian stock market.
1.4    RESEARCH HYPOTHESES      
    The following hypotheses will be tested:
1.    there is no relationship between Interest rate and share prices.
2.    there is no relationship between money supply and share prices
3.    there is no relationship between Inflation rate and share prices
4.    there is no relationship between Exchange rate and share prices in the Nigerian stock market
5.    There is no relationship between changes in the prices of shares traded on the floor of the Nigerian Stock Exchange and GDP.
1.5    SCOPE OF THE STUDY
    The scope of the study consists of major macroeconomic variables in the Nigerian economy, such as Interest rate, Money supply, Exchange rate, Inflation rate and GDP as well as the changes in the prices of shares traded on the floor of the Nigerian Stock Market using the NSE All share index for the period 1990 to 2009.
1.6    SIGNIFICANCE OF THE STUDY  
    Results of this study will be of utmost importance to policy makers in government, owing to the importance of the stock market to economic development, as well as other stakeholders such as strategic managers in business organisations, market Participants, Financial Analysts and Investors, Researchers/Academia, as well as students of Finance and allied disciplines in the management sciences.
Policy Makers in governments: The modern view of the Stock Market regards the economy as the handmaiden of the stock market. Consequently, stock market development has significant implications for economic development in any country. The price mechanism of the stock market is an indicator of the nature of the activities in any stock market as well as development of that stock market. This underscores the importance of the research problem to government policy makers since it will afford them the opportunity of being enlightened on some factors that affect stock prices in the Nigerian stock market and hence guide them in ensuring that they desist from making policies that will constrain these causative factors to distort stock market prices.
Market Participants: Results of this study will also be of importance to market participants as it will enable them to identify some leading or lagging indicators of market activities in the Nigerian Stock Market, especially with respect to stock price behaviour which can aid effective decision-making.
Financial Analysts and Investors: Financial analysts and portfolio managers will have their literature updated on the subject matter while investors and potential investors will have their interests stimulated on the need to monitor their investments regularly in line with proposed or current government policies in respect of identified causative factors of stock price behaviour. The outcome of such monitoring and evaluation could influence investors to take critical decisions about their investments. To this end they may need to consolidate their investment in a given security or to divest and re-invest in other securities, depending on the perceived effect that the factor(s) is/are likely to have on stock prices in the nearest future.
Strategic Managers of Business Organizations: Results of this study will afford strategic managers of business organizations the opportunity of knowing the factors that are likely to affect the prices of their securities. Such awareness could assist them to take proactive steps to adopt strategies that will counter the impact of negative government policies on the causative factors of securities’ price volatility, with a view to maintaining a reasonable degree of stability.
Researchers and the Academia: Results of this study will be of useful significance and interest to researchers as they will form the basis of comparison with existing literature on stock price behaviour in the Nigerian Stock Market and elsewhere. These researchers will definitely like to ascertain the extent to which such results are consistent with existing literature and if not, to proffer possible explanations for any consistencies. Furthermore, they may also wish to replicate the study under different research settings, using same or different methodologies and then find out whether the outcome will differ or be consistent with the findings of this study; and
Students of Finance and allied Disciplines in the Management Sciences: The research will arouse the interest of students of finance and allied disciplines and may thus form the basis for their research topics and/or problem definition in their project writing.
  1.7    LIMITATIONS TO THE STUDY            
    Since the establishment of the Nigerian Stock Exchange in1960 and the commencement of operations in 1961, the Nigerian Stock Market witnessed the worst stock market crash in history, starting from July, 2008. The devastating impact of the crash made nonsense of a significant number of securities, especially in the banking sector, and most of them are yet to recover. Consequently, a major limitation to this study is the likely distortion of the reaction of stock prices to the influence of the authentic determinants owing to the financial meltdown whose devastating impact on the Nigerian Stock Market is far from over.
    Secondly, the study relies heavily on secondary data. However, there are often conflicting values, for some of the variables under investigation, from different sources. Any such shortcomings in the values of the variables occasioned by the source of data used may constitute a constraint to the results of the study. Nevertheless, this constraint will be minimized by trying as much as possible to stick to data from the Federal Bureau of Statistics and the Central Bank of Nigeria, where available, since the two sources are credible.