ABSTRACT
In this study we have discussed the concept of stock markets and its operations and also how the stock market affected economic growth in Nigeria for a period 35 years (1981 to 2015). The study used the OLS estimation technique to empirically investigate the effect of stock market volatility on economic growth in Nigeria. The findings of this study can be summarized as; Market capitalization is a positive and significant determinate of economic growth in Nigeria. In addition, gross capital formation is a positive and insignificant determinate of economic growth in Nigeria. Furthermore, inflation is a negative and significant determinate of economic growth in Nigeria. Also turnover ratio and total value traded ratio are both positive but insignificant to economic growth in Nigeria. Finally, stock market volatility is a significant determinate of economic growth in Nigeria. Based on the findings of this study, it thus recommended that the SEC and related government agencies should endeavor to encourage more private limited liability companies and informal sector operators to access the market for fresh capital.
CHAPTER ONE
INTRODUCTION
- Background to the Study
The financial system can be described as the nervous system of any economy in the world be it a developed or developing economy. The role the financial system play in ensuring and stabilizing economic growth cannot be over looked. The financial system comprises of the central bank, commercial banks, mutual funds, brokerage firms, discount houses, Merchant banks, insurance companies and stock exchange, to mention but a few. These institutions trade in financial instruments such as domestic currency, foreign currency, stocks, bonds, and derivatives and so on, and in the process mobilize funds from surplus unit (savers) to deficit unit (investors) Abu (2009).
Schumpeter (1912) started the controversy surrounding the financial system in the economy and further supported by Abu (2009); Schumpeter (1912 cited in Abu, 2009) was of the opinion that in a well-functioning financial system, financial institutions help to facilitate economic growth by enhancing technological innovation through identification and funding of entrepreneurs with the best chance of successfully implementing innovative products as well as production process.Of all the functions the stock market is charged with, its function of liquidity is of paramount importance (Ezeoha et al, 2009) as without a liquid stock market many long-term profitable investment would not be undertaken (Levine, 1991).
Stock market volatility is a measure for variation of price of a financial asset over time. It is essentially, concerned with the dispersion and not the direction of price changesOsazevbaru(2014), issues of volatility in stock market behaviour are of importance as they shed light on the data generating process of the returns (Hongyu and Zhichao, 2006 cited in Osazevbaru, 2014). As a result, such issues guide investors in their decision making process because not only are the investors interested in returns, but also in the uncertainty of such returnsOsazevbaru(2014).
The stock market effectively started operations in Nigeria on 5th June 1961 under the provision of the Lagos stock exchange Act 1961, which transformed into Nigerian Stock Exchange in December, 1977 as a result of the review of Nigerian financial system (CBN, 2007).The primary aim of the Nigerian Stock Market is to mobilize long-term funds from individuals, investors and corporate bodies and channel the funds to productive activities for economic advancementOkoro (2016). The Nigerian Stock Exchange (NSE) is the center point of the capital market while the security and Exchange commission (SEC) serves as the apex regulatory body. To enable small as well as large-scale enterprises gain access to public listing, the NSE operates the main Exchange for relatively large enterprises, and the Second – Tier Security Market (SSM) where listing requirements are less stringent for small and medium scale enterprises.
Available statistics shows that prior to 2008-2009, the Nigerian stock market fared well, as market indicators (market capitalization, market turnover and the all-share index) grew from low to historically high levels. For instance, market capitalization was put at ₦466.17billion in 2000 and grew to ₦13, 295billion by 2007 (CBN, 2015). In the same manner, market turnover increased from 0.014Nbillion in 1970 to ₦0.52billion in 1980 but declined to ₦0.31billion in 1990. Market turnover resumed a rising trend, jumping to ₦28.15billion and ₦2,100billion in 2000 and 2007, respectively. The all-share index also did well, increasing from 100 points in 1984 to 513.8 points in 1990 and further to 8,111.00 points in 2000 (NSE, 2010). The all-share index reached its peak in December, 2007, standing at 57,990.2 points. Unfortunately, the boom experienced in the market has been reversed, as market indicators have declined very rapidly, as at 2016:Q2 market capitalization stands at approximately at ₦17,280billion, while the all-share index is put at 29,597.79 points (CBN, 2016: Q2).
Evidently, there have been a down turn of events since 2007 in the Nigerian stock market, it is thus of essential importance to reinvestigate to what effect does changes in stock market activities has on the overall performance of the Nigerian economy. It is against this background that this study tends to analyze stock market volatility and its influence on the Nigerian economy.
- Statement of the Problem
In recent times there has been a growing concern on the role of capital market in economic growth and thus the capital market has been the focus of economic policies and policy makers because of the perceived benefits it provides for the economyOkoro (2016). The capital market provides the fulcrum for stock market activities and it is often cited as a barometer of business direction. An active capital market may be relied upon to measure changes in the general level of economic activities (Obadan, 1998).Deducing from the extensive studies on the theoretical expectations on the role of capital markets on economic growth which have formed the core of normative economics, the capital market is expected to contribute to investment through the transmission mechanisms of savings mobilization, creation of liquidity, risk diversification, improved dissemination and acquisition of information, provision of long-term, non-debt financial capital which enables companies to avoid over-reliance on debt financing, and enhanced incentive for corporate control amongst others (Iyoha and Ekanem, 2004).
Available statistics shows that prior to 2008-2009, the Nigerian stock market fared well, as market indicators (market capitalization, market turnover and the all-share index) grew from low to historically high levels. For instance, market capitalization was put at ₦466.17billion in 2000 and grew to ₦13, 295billion by 2007 (CBN, 2015). In the same manner, market turnover increased from 0.014Nbillion in 1970 to ₦0.52billion in 1980 but declined to ₦0.31billion in 1990. Market turnover resumed a rising trend, jumping to ₦28.15billion and ₦2,100billion in 2000 and 2007, respectively. The all-share index also did well, increasing from 100 points in 1984 to 513.8 points in 1990 and further to 8,111.00 points in 2000 (NSE, 2010). The all-share index reached its peak in December, 2007, standing at 57,990.2 points. Unfortunately, the boom experienced in the market has been reversed, as market indicators have declined very rapidly, as at 2016:Q2 market capitalization stands at approximately at ₦17,280billion, while the all-share index is put at 29,597.79 points (CBN, 2016: Q2).
During this period the Nigerian economy has been relativelyunstable as Nigeria’s record of development has been very poor. Many economic indicators show, Nigeria’s economy has experienced different growth stages. The GDP growth rate recorded negative growth in the early 1980s (-1.053 in 1982, -5.05 in 1983 and -2.022 in 1984). The growth rate increased steadily between 1985 and 1990 but fell sharply in 1986 and 1987 by -8.754% and -10.752%. Except in 1991 when the growth rate was recorded at 2.206% while, 1990s witnessed an unstable growth. However, the growth rate has been relatively high since 2000, (IMF, 2015 cited in Onwuchekwa, 2016), with an average of 5.91% from 2005-2015.
It becomes imperative to investigate the effect of stock exchange volatility on economic growth in Nigeria.
- Research Question
The foregoing research problem brings to mind the following research questions
- What is the effect of market capitalization on economic growth in Nigeria?
- Does stock market turnover ratio have any effect on economic performance in Nigeria?
- What is the effect of stock market volatility on economic growth in Nigeria?
- Research Objectives
The broad objective of this study is to empirically investigate the effect of stock market volatility on economic activities in Nigeria. In achieving this objective the following specific objective are given;
- Investigate empirically, the effect of market capitalization on economic growth in Nigeria.
- Investigate empirically, the effect of market turnover ratio on economic growth in Nigeria.
- Investigate empirically, the effect of stock market volatility on economic on economic growth in Nigeria.
- Research Hypotheses
The research hypotheses that will guild this study are given and specified in their null forms as;
- H0: market capitalization does not have any effect on economic growth in Nigeria.
- H0: market turnover ratio does not have any effect on economic growth in Nigeria.
- H0: stock market volatility does not have any effect on economic growth in Nigeria.
- Significance of the Study
This study will be of significant importance to companies listed on the stock change, Nigerian Stock Exchange Commission and its stakeholders, policy makers and investors for better decision making and also to students and researchers as a reference point and bedrock for further study.
- Scope of Study
This study will cover a period of 35 years (1981-2015), this study was selected based on availability of data. The study covers all listed companies in the Nigerian Stock Market and applicable thereof.
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