MACROECONOMIC VARIABLES AND STOCK PRICE MOVEMENT IN NIGERIA: AN IMPACT ASSESSMENT
ABSTRACT
This study examines the relationship between macroeconomic variables and stock price movements in Nigeria for a period of 29 years (1985 to 2013). In order to obtain the dynamic properties of the analysis, time series estimation techniques were applied in the study. Essentially, the correlation coefficient and the ordinary least squared (OLS) econometric technique were employed.
The results from the empirical analysis show that the naira exchange rate does not have any significant impact on share prices; the level of income and general economic performance (RGDP) is a major determinant of share price changes in Nigeria; inflation rate does not have a significant effect on changes in stock prices in Nigeria; interest rate does not have any significant impact on stock price changes. As interest rate rises, stock prices seem to fall; money supply has a strong positive effect on share prices in Nigeria, and the past values of share prices (SP) have a significant relationship with macroeconomic variables in Nigeria than the current values.
The study recommends that policy makers in should evolve an enduring macroeconomic policies that will ensure stable prices and at the same time improve the activities in the stock market. Sudden changes in inflationary trend should be minimized. If price level changes are regularized and spread over a longer period of time, the investors will not feel the sudden need to withdraw from the stock market. Finally, an appropriate policy that will minimize or ensure a favourable interest rate should be pursued vigorously by the country’s monetary authority in this regard.
TABLE OF CONTENT
CHAPTER ONE: INTRODUCTION
Background to the Study
Statement of the Research Problem
Research Questions
Objective of the Study
1.5 Hypotheses of the Study
1.6 Significance of the Study
1.7 Scope of the Study
1.8 Limitation of the Study
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction
2.2 Stock Prices and Macroeconomic Variables
2.3 Interest Rate
2.4 Money Supply and Stock Prices
2.5 Inflation
2.6 Exchange Rate and Stock Prices
2.7 Stock Prices and Gross Domestic Product (GDP)
2.8 Theories of Stock Price Behavior
2.9 Fundamental Theory of Stock Price Behavior
2.10 Technical Theory of Stock Price Behaviour
2.11 The Behavioural Theory of Stock Price Behavior
2.12 Macroeconomic Hypothesis School
2.13 Efficient Market Hypothesis
2.14 The Empirical Literature
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Preamble
3.2 Model Specification
3.3 Method of Data Analysis
3.4 Sources of Data
CHAPTER FOUR: EMPIRICAL ANALYSIS
4.1 Introduction
4.2 Correlation Analysis
4.4 Regression Analysis
CHAPTER FIVE: SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSION
5.1 Summary of Findings
Conclusion
5.3 Recommendations
Bibliography
Appendices
CHAPTER ONE
INTRODUCTION
BACKGROUND TO THE STUDY
The place of macroeconomic variables in the determination of stock price movement cannot be overemphasized. This is true because, globally, stock prices are believed to be subject to some basic economics fundamentals, just as firms’ performance, commodity prices and labour markets. Supply and demand are the two basic factors that universally affect pricing in free markets. Shaftoe (2014) argues that macroeconomic variables are measures used to gauge growth, changes and trends in the overall economy. As various economic data are made public, stock prices react accordingly, based on investors' notions of how economic measures affect the market in general as well as particular stocks that may be more or less vulnerable to changes in the economy. However, stock prices are also partially driven by long-term macroeconomic factors.
Miller and Modigliani (1961) on the issue of dividend discount model succinctly established the relationship between stock prices and macroeconomic variables. Accordingly, the current price of an equity share is equal to the present value of all future cash flow to the share. Therefore any economic factors which influence the expected future cash flow and required rate of return in turn influence the share. Arbitrage price theory by Ross (1976) hypothesizes relationship between stock prices and certain macroeconomic variables. Fama and Gibbon (1982) find that expected real returns on bills and expected inflation rates are inversely related. This is due to positive correlation between expected real returns on financial assets and real activity. Using multi-factor APT framework, Hamao (1988) shows that inflation significantly influenced Japanese stock prices.
Several studies conducted in the emerging markets provide substantial evidence that share returns fluctuate with changes in macroeconomic variables. Thus, aggregate share prices are expected to have strong relationship with macroeconomic factors (Maysami, Howe and Hamaz, 2004). This argument suggests that the intrinsic value of equity shares depends on the present value of dividends which is distributed out of company earnings; these earnings are influenced by real economic activities and, therefore, there should be a relationship between economic fundamentals and share prices. However, it remains to be observed whether the argument holds true in the context of emerging markets such as Nigeria too. Compared to their developed counterparts, the emerging markets are smaller in size and relatively less liquid. More also, the investor perception in emerging markets may be different from those in developed markets and thus the behaviour of market prices of equities may be driven by the speculative activities of irrational investors rather than economic fundamentals. But on the bases of the various submissions from the extant empirical literature in the developed and emerging markets, it is obvious that the role of macroeconomic factors in determining stock prices movement cannot be underestimated. It has also been argue that this hypothesized relationship has been studied mainly using single composite stock market index. It is well known that a composite stock index includes stocks from different sectors and there is a possibility that macroeconomic variables may affect different sectors of the economy (Maysami, Howe and Hamaz, 2004; Robert, 2008; Ratanapakorn, and Sharma, 2007).
The Nigerian economy is such that is shrouded in unstable macroeconomic environment occasioned by the obnoxious and ill-timing government monetary and fiscal policies, as well as endemic issue of corruption among public office holders. These have had great consequences on the overall activities of the Nigerian capital market overtime. Currently, oil prices are fast dwindling beyond human comprehension, estimated budget for 2016 of over 7trillion Naira is almost a mirage and government is currently engaging on a contractionary fiscal policy measure as a way to improving is revenue generation. It is however believed that with the right fiscal and monetary approach coupled with appropriate legislations to better reposition the Nigerian stock market, share prices will again continue to appreciate.
STATEMENT OF THE RESEARCH PROBLEM
Stock price volatility is particularly importance to investors and security analysts. Several studies in the extant literature have long established the pattern of stock price movements and those factors mainly responsible for such changes (Inegbedion, 2008). Some studies such as Mookerjee and Yu (1997), Chen et al. (1986), Ratanapakorn and Sharma (2007), Naik and Padhi (2012) 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.
Several empirical studies have been carried out in an attempt to determine the impact of macroeconomic factors and stock prices. For instance, while the studies of Peng, Cui, Groenewold and Qin (2010), Naik and Padhi (2012) find a unidirectional relationship between macroeconomic factors and stock prices; Chen et al. (1986), Mukherjee and Naka (1995), Maysami et al. (2004), Rahman et al. (2009) find a strong positive relationship; but Ratanapakorn and Sharma (2007), Mookerjee and Yu (1997), Abugri (2008), Benaković and Posedel (2010), Omorokunwa and Ikponmwosa (2014) submitted a mix findings between macroeconomic factors and stock prices.
In view of these conflicting empirical findings, we thus deemed it necessary to investigate in an empirical manner the relationship between macroeconomic variables and stock prices in Nigeria and to see the extent to which stock prices are affected by the hypothesized macroeconomic factors. Also, the essence of security analysis is to advice the investors on how to make purchasing decision that will assist them to optimize 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 (Fama, 1970; Chen, Roll and Ross, 1986).
1.3 RESEARCH QUESTIONS
Specifically, this study seeks to provide answers to the following research questions:
i) What is the relationship between interest rate and stock prices in Nigeria?
ii) Is there a significant relationship between Money supply and stock prices in Nigeria?
iii) Does inflation rate have significant effect on stock prices in Nigeria?
iv) What is the relationship between exchange rate and stock prices in Nigeria?
v) Is there a significant relationship between gross domestic product (GDP) and stock prices in Nigeria?
OBJECTIVE OF THE STUDY
The objectives of the study are to:
i) Determine the relationship between interest rate and stock prices in Nigeria.
ii) Examine the relationship between Money supply and stock prices in Nigeria.
iii) Evaluate the relationship between inflation rate and stock prices in Nigeria.
iv) Determine the relationship between exchange rate and stock prices in Nigeria.
v) Examine the relationship between gross domestic product (GDP) and stock prices in Nigeria.
1.5 HYPOTHESES OF THE STUDY
The following hypotheses will be tested in the course of the study:
i) There is no significant relationship between interest rate and stock prices in Nigeria.
ii) Money supply does not have any significant impact on stock prices in Nigeria.
iii) There is no significant relationship between inflation rate and stock prices in Nigeria.
iv) Exchange rate does not have any significant impact on stock prices in Nigeria.
v) There is no significant relationship between gross domestic product (GDP) and stock prices in Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
The study is relevant in the following respects:
Policy Makers: The results from the study will provide them relevant information that will assist them in formulating appropriate policies and programmes that would help strengthened the stock market activities and enhance stock prices.
The Governments: The government is expected to play regulatory role as well as providing the necessary conducive environment for the stock market to strive efficiently. Thus, this study will be found relevant to the government in assisting it to know what area it is expected to provide the needed attention and assistance as well as developing the right macroeconomic policies that improve the market in general.
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 investment 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 effects that the factor(s) is/are likely to have on stock prices in the nearest future.
Researchers and the Academia: Results of this study will be of interest to researchers as they will provide them relevant data and form the basis of comparison with existing literature on stock price behaviour in the Nigerian Stock Market and elsewhere. And also to carry out similar studies in the same area if they so wish.
Students of Finance and allied Disciplines: The study will arouse the interest of students of finance and allied disciplines and may thus form the basis for further studies either in the same area or other similar areas of interest.
1.7 SCOPE OF THE STUDY
The study is a Nigeria specific study, covering a period of 30 years (1985 to 2014). Relevant data will be sourced from the Central Bank of Nigeria Statistical Bulletin.
1.8 LIMITATION OF THE STUDY
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 Central Bank of Nigeria Statistical Bulletin which is one of the most reliable sources of data in the country.
Secondly, the measurement of variables as well as the method of data analysis might not be adequate enough or free from errors. However, efforts will be made to ensure that errors are minimized so that the results so obtained are reliable and acceptable for appropriate policy decisions.
