STOCK PRICE CHANGES IN NIGERIA: CAUSES AND IMPLICATIONS (1990-2009)
ABSTRACT
The study empirical examined the causes of changes in stock prices and the implications of such findings, using a quarterly data from the Nigerian stock market, 1990 to 2009. It is argued that the factors behind changes in stock prices may be potent enough to create necessary directions in overall stock market performance in Nigeria. In order to obtain the dynamic properties of the analysis, time series estimation techniques were applied in the study. Essentially, the cointegration and error correction method was employed. Moreover, quarterly time series data was used in the estimation. The results show that the level of income and general economic performance is 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 impact on stock price changes especially in the short run.  Interest rate on the other hands, has a strong negative impact on stock price changes, and while exchange rate has a strong positive impact on the changes in stock prices. Inflation rate does not have significant impact on changes in stock prices in Nigeria.
TABLE OF CONTENTS
CHAPTER ONE
1.1    Preamble    -    -    -    -    
1.2    Statement of the Research Problem    -    -    -
1.3    Specific Research Questions     -    -    -    -
1.4    Objective of the Study    -    -    -    -    -
1.5    Hypotheses     -    -    -    -    -    -    -
1.6    Significance of the Study     -    -
1.7    Scope of the Study    -    -    -    -    -    
CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.1    Preamble     -    -    -    -
2.2     The Nigerian Capital Market     -    -    
2.2.1    The Role of the Capital Market in the Development of the
Nigeria Economy    -    -    -    -    
2.3    Empirical Evidence of Exchange Rate Volatility and Stock
Market Returns         -    -    
2.3.1    Evidence from Advanced Stock Markets     -    -
2.3.2    Evidence from African Markets and other Emerging Markets     -       
2.3.3    Evidence from some West African Countries     -    -
2.4    Global Financial Meltdown     -    -    -
2.5    Theoretical Frame work    -    -    -    -    
2.5.1    Interest Rate and Stock Prices    -    -    -    -
2.5.2    Inflation Rate and Stock Prices     -    
CHAPTER THREE
RESEARCH METHODOLOGY
3.1    Preamble     -    -    -    -    -    -    -
3.2    Research Design     -    -    -    -    -    -
3.3    Population of the Study     -    -    -    -    
3.4    Sampling Design    -    -    -    -    -
3.5    Sources of Data/Research Instrument     -    -    -    -
3.6    Model Specification     -    -    -    -    -    
3.7    Method of Data Analysis     -    -    -    
CHAPTER FOUR
PRESENTATION AND ANALYSIS OF DATA
4.1    Preamble     -    -    -    -
4.2    Unit root   Analysis     -    -    -    -
4.3    Cointegration Analysis     -    -    -    -
4.4    The Error Correction Mechanism (ECM) (Short  -run Analysis)     
4.5    The Long-run Relationships     -    -    -    
CHAPTER FIVE
SUMMARY OF FINDINGS, DISCUSSION OF FINDINGS, CONCLUSION, AND RECOMMENDATIONS
5.1    Summary of Findings     -    -    -    -
5.2    Policy Implications of Results     -    -    -
5.3    Recommendations     -    -    -    -    
5.4    Conclusion     -    -    -    -    -    
    References     -    -    -    -
    Appendix     -    -    -    -
 LISTS OF TABLES
4.1    Unit root test for variables in levels     -    -    -
4.2    Unit root Test for variables first difference     -    -    
4.3    Results of Engle and granger Residual conintegration tests    
4.4    The short-run Dynamic model     -    -         -         
4.5    The long-run behavour of stock price changes in Nigeria            
 CHAPTER ONE
INTRODUCTION
        The capital market is vital to the development of any economy.     Consequently, changes in the capital market indicators and stock prices     have implications for the economy in general. It is for this reason that     stock market crash often attracts global attention since it has the ability to     precipitate a financial crisis. In prospects of overall economy, Ologunde,     Elumilade and Asaolu (2006) mentioned that the stock market makes it     possible for the economy to ensure long-term commitments in real     capital. For this reason, the level of efficiency measurement of the stock     market is very important to investors, policy makers and other major     players.
From an economic point of view, the price of a commodity is determined by the forces of demand and supply, in a free economy but it is not clear what factors determine demand and supply in the securities market, whether in the primary or secondary market, the price of equity is significantly influenced by a number of factors which include the book value of the firm, divided per share, earning per shares, price earning ratio and dividend cover (Gumpers, Ishii and Metrick, 2003). The most basic factors that influence stocks prices are demand and supply factors (Somoye, Akintoye, and Oseni 2009). Once the demand for a given security increases, the price moves up. The reverse is also the case when the demand decreases. Government policies, firm’s and industry’s performance and potentials have effects on demand behaviour of investors, both in the primary and secondary markets. Consequently, the factors affecting the price of an equity share can be viewed from the macro and micro economic perspectives (Somoye et al 2009). Macroeconomic factors include politics and general economic conditions, how the economy is performing, government regulation etc. There may be other factors like demand and supply conditions which can be influenced by the performance of the company as well as the performance of the company vis-à-vis the industry and other variables. In a study of the impact of dividend and earnings on stock prices, Hartone (2004) argued that significant positive impact is made on equity prices if positive earnings information occurs after negative dividend information. Also, a significant negative impact occurs in equity pricing if positive dividend information is followed by negative earning information. Docking and Koch (2005) observed that there was a direct relationship between dividend announcement and equity price behaviour. In their study of the effect of earning (Micro economic factor), inflation and interest rate (macro-economic factors) on the stock prices on the Kuwait Stock Exchange, Al-Qenae and Wearing (2002) discovered that macro-economic factors significantly impact stock prices negatively. A previous study by Udegbunam and Eriki (2001) of the Nigerian capital market also showed that inflation was inversely negatively correlated to stock market price behaviour.
One of the most significant macroeconomic variables is exchange rate. Exchange rate behaviour determines, to a large extent, the behaviour of several other macroeconomic variables in an economy (Oaikhena and Edo, 2000). This is especially so in highly import dependent economies such as Nigeria and other sub-Saharan African Companies. It is not surprising, therefore, that most countries of the world pay close attention to the behaviour of exchange rate of their currencies viz-a-viz other currencies of the world. This is on account of the fact that apart from the implication the behaviour has for the competitiveness of a country’s goods and services abroad, it also has implications for the soundness or otherwise of an economy a well as the strength of the economy within the community of Nations (Oaikhena and Edo, 2000). Prior to 1986 when the military regime of Ibrahim Babangida put in place a structural adjustment programme (SAP), exchange rate as a macroeconomic variable was little known in Nigeria. But with the floating of the exchange rate, in implementing the SAP policy, the variable which is the price of one currency in terms of another started to attract national attention.
1.2    STATEMENT OF THE RESEARCH PROBLEM
Some researchers have also tried to determine the correlation between selected factors (internal and external, market and non-market, as well as economic and non economic) and stock price volatility. The outcomes of the studies vary, depending on the scope, the assets and factors examined. Amadi and Odubo (2002) conducted a study on macroeconomic variables and stock price volatility and concluded that the results are consistent with existing theory. Zang (2004) designed a multi-index model to determine the effect of industry, country and international factors on stock pricing. Byers and Growth (2000) defined the process of asset pricing as a function of Utility (economic factors) and non-economic (psychic) factors. Agyapong (2009) conducted a study on the effect of exchange rate volatility on the Ghana stock exchange and concluded that there was an inverse relationship between exchange rate volatility and stock market returns.
          So it is clear that there is lack of theoretical and empirical consensus on     this relationship and direction of causation. However, the linkage     between causal-effects and stock price volatility is important. The present     study is motivated by the relatively lack of consensus on  stock     price     changes using multifactor determinants that include inflation rate,     interest rate, exchange rate and GDP. It provides empirical evidence on     the causes and implications of stock price changes (volatility) in the     Nigerian stock market. Consequently, this study intends to examine the     causes and implications of Stock Price Changes. Specifically, this study seeks     to provide answers to the following research questions:  
1.3    SPECIFIC RESEARCH QUESTIONS
          The following specific research questions will be answered in this study:
(i)      is there a relationship between stock price changes and fluctuations in GDP?
(ii)    is there a relationship between stock price changes and money supply?
(iii)    is there a relationship between stock price changes and interest rate fluctuations?    
(iv)     is there a relationship between stock price changes and Inflation rate?
(v)     is there a relationship between stock price changes and exchange rate fluctuations?
1.4    OBJECTIVES OF THE STUDY
The objectives of the study are to determine:
  (i)    The relationship between stock price changes and GDP.
 (ii)    the relationship between stock price changes and money supply.
 (iii)    The relationship between stock price changes and changes in interest rate; and
 (iv)    the relationship between stock price changes and changes in inflation rate;
 (v)    The relationship between stock price changes and changes in exchange       rate;
1.5    HYPOTHESES
        The following hypothesis (stated in null form) would be tested:
(i.)    There is no relationship between stock price changes and changes in GDP.
(ii)    There is no relationship between stock price changes and money supply      
(iii.)    There is no relationship between stock price changes and changes in interest rate
(iv.)    There is no relationship between stock price changes and changes in     inflation rate;
(v.)    There is no relationship between stock price changes and changes exchange rate;
1.6    SIGNIFICANCE OF THE STUDY
The price mechanism of any stock market is vital to the effective allocation of resources in the capital market and the movement of share prices is an indicator to existing and potential investors on the implication of such movement to their investment (Inegbedion, 2009). Besides, as a major component of the financial system of any country, the operations of the capital market, especially that of asset pricing, is of important significance to policy makers. Consequently, results of this study will be useful to policy-makers in government and other stakeholders such as investors, market participants, as well as researchers and the academic.
Government Policy Makers:- If exchange rate volatility is related to stock price volatility, then the need for government to adopt policy measures to control exchange rate volatilities to forestall a devastating impact of share prices becomes an imminent priority since a crash in stock market prices, as is currently being experienced, has serious implications on the economy. This underscores the significance of this study to government policy makers;
Investors:- Results of the study will also assist investors in making well informed judgments regarding their investments in line with changing trends in the exchange rate regimes;
Market Participants:- These categories of people will also make it a point of duty to study data on exchange rates and hence make informed decisions that will enable them and their clients optimize their returns, given that the results of the study indicate any significant relationship, between stock market returns and exchange rate  volatility as well as stock market returns.
Researchers and The Academia:- Researchers and the academia will be acquainted with empirical data on the relationship between stock price behaviour and volatilities in exchange rate in Nigeria. Such awareness will arouse the curiosity of researchers and thus stimulate further researches to consolidate or validate the outcomes; and
Students of Finance:- Results of the study will serve as a veritable source of research topic to students of finance and allied disciplines in the management sciences as well as constitute data that will prove relevant to other related research topics.
1.5    SCOPE OF THE STUDY
This study will focus on selected stock prices in the Nigerian stock Exchange.  The study covers a period of twenty years (1990-2009), with a quarterly data from the Nigerian all share index for the period under investigation.