IMPACT OF INFLATION ON THE NIGERIAN STOCK MARKET
CHAPTER ONE
INTRODUCTION
BACKGROUND TO STUDY
Stock market especially plays a vital role in mobilizing economic resources within and outside the economy to achieve better economic potentials. It serves as an important conduct though which fund flow from individuals and corporate bodies across the globe to investor residing in a particular economy. Higher stock return imply higher profitability by firms and hence the overall growth of the economy. Volatility in stock prices, occasioned by inflation rate breads uncertainty, which impair effective performance of the financial market and the economy at large. According to Pindy (1984) an unexpected increase in stock price volatility today lead to the upward revision of future expected volatility and risk premium which further lead to discounting of future expected cash flow (assuming cash flows remains the same) at an increased rate which results in lower stock price or negative return today stock return volatility therefore refers to variation in stock price occasion by initiation rates over a period of time. This more often is perceived by investors and other agents as a measure or risk on their part policy makers and rational investors use market estimate of volatility as a tool to measure the vulnerability of the stock market. According to Karoly (2001) strong asymmetric relationship exists between stock return and stock return volatility, and stock price volatility is higher when stock price decreases than when price increase Fame (1981) state that stock price are the reflector of various variable such as inflation exchange rate interest rate and industrial production. Rigobon and stock (2004) empirical result showed that increase in the short term interest, rate negatively impact the stock price with the largest  effect on the NASDAQ index. They also revealed that short term rate has a positive and significant impact on  market interest rates. Generally angle and Rangel (2005) provided evidence of impact of overall health of the economy on uncondition market volatility the concluded that countries with high rate of inflation experience large expected volatility than those with more stable price. In a comparative study on the impact of inflation on conditional stock market volatility in turkey and Canada, Sangal (2007) established evidence of a strong time varying volatility for stock market return in both market, and on the impact of inflation on conditional stock market volatility, the researcher found that the rate of condition market volatility turkey which has higher inflation rate than Canada.   
A study in the US shows that high expected inflation has tended to concede with period of  hightend uncertainty about real economic growth and unusual high risk aversion both by which rationally raise equity yield, (Bekaert and Engstrom, 2009). According to them countries with a high incidence of stagflation should have relatively high correlation between bond yields and equity yield. Other empirical studies in the area either established weak predictive power of inflation on stock market volatility and returns for instance, Kall (1987) Schwert (1987), Davis and Kutan (2003), while other like Hamilition and Lin (1996) Engle (2004) Engle and Rangel (2005) Rizwan and (2007) etc established a strong predictive power of inflation on stock market volatility and returns.
1.2    STATEMENT OF THE PROBLEM
  The impact of inflation on stock prices in the Nigerian stock market has been of great interest to development economists and policy market alike. The Nigerian stock market is a lubricant for economic growth and development. This is so because the Nigerian stock market mobilizes fund from the surplus unit to the deficit unit which in turn constitute the motor of economic expansion economic reform is expected to affect the Nigerian stock market as part of the strategy to restore internal balance. However unless policy market know the major fact that affect the Nigerian stock market and how it affect the mobilization of fund such a policy decision can be harmful to investment. This study seek to examine the impact of inflation on the Nigerian stock market.
1.3    OBJECTIVE OF THE STUDY
    The main objective of this study it to examine the relationship between stock prices and inflation rate, specifically the study seek to.
To investigate empirically, the effect of inflation on the Nigerian stock market
To identify the macro economic factors that influence inflation in Nigerian.
1.4    RESEARCH QUESTION
    This research work shall be guided by the following research question.
To what extent does inflation affect stock price the  Nigerian stock market.
What are the macro economic factor influencing inflation on rate in Nigeria.
1.5    RESEARCH HYPOTHESES
    The following are the research hypothesis for this study
Ho: Inflation does not affect stock price in the Nigerian stock market.
Hi:    Inflation affect stock price in the Nigerian stock market.
1.6    SIGNIFICANT OF THE STUDY
    The study will be relevant to the following group of persons in the Nigerian economy.
    The finding of this study will be very relevant to the government and policy market. It will inadvertently provide them relevant information on how inflation affect stock prices and hence formulate appropriate policies and programmes that will enhance stable macro-economic environment in the stock exchange.
Policy market and government: Owing to its roles in economic development, a vibrant capital market has significant implication for the economy. Consequently, it is incumbent on policy market in government to do all they can to encourage investors to participate actively in trading with a view to enhancing the vibrancy, of the market  consequently, if result of this study show that the market is not efficient in the week –form efficient market hypothesis, policy market with attempt to adopt measures to address the market distortions with a view to reducing the level of inefficient and thus make the market efficient or near efficient. This will help to ensure fairness of equity returns to investors and thus ensure stability of the capital market.
Financial Analysts and Investors: Financial analysis and investor will find the result of this study very significant as it will provide them the opportunity of checking the consistency of the result with theory as well as with existing literature, such comparison will equip the financial analyst with relevant result to make reasonable generalization about the impact of inflation rate on stock price in the Nigerian stock market.
Market participant: This category of people will also find the result of this study inflation rate plays dominant role in influencing share price.
Fund Seekers: Result of the study will also be of significant to fund seeker as it will determine their level of participation in the sourcing of median long term funds from the capital market.
Research: Researcher will fund the result of this study useful as some may be interested in verifying such result which other may wish to methodologies whatever, the case may be result of the study will constitute the basis for further studies.
Student of banking and finance: Lastly result of this study will constitute data that will be useful to student of banking and finance as well as allied disciplines in the management sciences.
1.7    SCOPE OF THE STUDY
    The scope of this study is restricted to ten quoted firms on the floor of the Nigerian stock market and relevant data covering the period of twenty years (1991 – 2011) will be sourced from the Nigerian stock exchange and CBN statistical Bulletin.
1.8    LIMITATION OF THE STUDY
    The fact that  not all the worker in the Nigerian stock market have indepth knowledge of all the activities going on in the Nigerian stock market this served as a limitation to this study.
    Finance constrained which has led to the reduction of the population also the unwillingness of some key player in the Nigerian stock market to reduce relevant data that are vita to this research.
1.9    ORGANIZATION OF THE STUDY
    The presentation of the this study takes the following form: The first chapter is introduction, the second deals with the literature review and related issues on the Nigerian stock market recent development in Nigerian stock exchange movement shall also be discussed in the chapter: the third chapter shall focus on the research methodology and model specification, chapter four of the study deals with the analysis  of data and discussion of the empirical result of the estimation and while chapter five focuses on summary, recommendation and conclusions.