MACROECONOMIC VOLATILITY AND STOCK MARKET BEHAVIOUR: EVIDENCE FROM NIGERIA

 

By

Adedoyin Isola Lawal

Department of Accounting and Finance

College of Business and Social Sciences

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Abstract

This paper focuses on macroeconomic volatility and stock market behaviour in Nigeria within the context of endogenous growth model; Hicks IS-LM theory; Arbitrage Pricing theory and the Monetary Policy Channels theory. The relevant literature points to the existence of a functional relationship between stock market behaviour and macroeconomic variables. This relationship can be examined from two literature strands viz: first moment and second moment strands. The is concerned with the relationship between the two at the second moment in that it (the second moment) lays emphasis on how risk or volatility of the macroeconomic variables affects stock market behaviour since it is the volatility of the macroeconomic variables that makes stock market planning difficult. The variables used are Real Gross Domestic Product (RGDP); Money Supply (M2); Interest rate (INT); Inflation rate (INF); Oil price (OIL); Exchange rate (EXC); Net Credit to the Private Sector (NDC)and the All Share Index (ASHI). The Unit root tests show that the order of integration of the variables are not of the same order, this informs the use of Autoregressive Distributed Lag (ARDL) estimation techniques to examine the nature of the relationship among the variables. The study further used the Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH) to examine the impact of macroeconomic variables volatility on stock market in Nigeria. The results from the ARDL models show that a compelling long run relationship exists among the variables when the regressions are normalized in the InASHI, INT, EXC, INF, InNDC and OIL. The relationship between each of the macroeconomic variables and the ASHI is negative in the short run. The ECM result shows that the speed of adjustment from disequilibrium to equilibrium is fast at about 63.3% and is highly significant. The ARDL result is stable as indicated by both the CUSUM and CUSUMQ curves. The EGARCH results show that large innovations irrespective of their signs increase the ASHI volatility. On individual macroeconomic variables volatility as it exerts on stock market, it can be deduced that both the asymmetric impact and size of shocks of the RGDP, INF, M2, INT, EXC and the NDC exerts on the ASHI. In order to develop the stock market, the study recommends that policy makers should pursue strong economic growth, increase money supply, lower the interest rate, strengthen the naira, increase the NDC andincrease inflows from the oil pump price. It is also recommended that market practitioners should pay keen attention to movements in each of these variables and mirror their investment decisions after these movements.

About the Presenter

Mr. Lawal Adedoyin Isola is a Faculty in the Department of Accounting and Finance, Landmark University, Omu Aran, Nigeria. He holds a Bachelor degree in Economics from the University of Ilorin, Ilorin, and Masters degree in Banking and Finance from Bayero University, Kano. He is close to completing his Ph.D. programme in Banking and Finance at Covenant University, Ota. Lawal has published extensively in reputable Journals. He reviews for a number of Journals like African Development Review (Wiley); The Quarterly Review of Economics and Finance (Elsevier); International Journal of Emerging Markets (Emerald Insight); Cogent Social Sciences (Taylor and Francis); Palgrave Communication (Palgrave); Asian Economic and Financial Review; International Journal of Business, Economics and Management; and Journal of Empirical Research. He is on the Editorial Board of the Binus Business Review (Binus University, Indonesia) and Human and Social Science LettersMr. Lawal Adedoyin Isola is a Lecturer I in the Department of Accounting and Finance, Landmark University, Omu-Aran.