macroeconomic factors that influence stock market development in nigeria


Effective mobilization and allocation of investment funds to enable business and the economies harness their human, material and management resources for optimal output have long been advocated in financial literature; the stock market plays a prime role as the medium through which efficiency in capital formation and allocation is mostly promoted. This shows the prominent place which the development of the stock market can play in promoting the growth of businesses and the economies including developing country such as Nigeria. Identifying the underlying factors that influence the development of the stock market has been a subject of debate among economists and financial experts. Some studies have identified macroeconomic factors that influence stock market development (Akpan, Inya-agha and Aya, 2011; Caldron-Rossell, 1991; Demirguc-Kunt and Levine, 1966; Garcia and Liu, 1999; Naceur, Ghazouani and Omran, 2005; Yartey, 2008; Zafar, 2013) while others have concentrated on identifying both macroeconomic factors and institutional qualities (Cherif and Gazdar, 2010; Yartey, 2007, 2010).


However, stock market development is a multidimensional concept. It is usually measured by stock market size, liquidity, volatility, concentration, integration with world capital markets, or the legal rule (otherwise regulation and supervision) in the market (Garcia, 1999). Many researchers used market capitalization as a percentage of gross domestic product (GDP) to measure stock market development


because it is believed to be a better proxy and less arbitrary than other individual measures of stock market development that are often used such as number of listed companies, change in the stock market index, index of stock market size and liquidity (Yartey, 2008). The assumption behind market capitalization and gross domestic product measure is that overall market size is positively correlated with ability to mobilize and diversify risk on an economy-wide basis as captured by the GDP. Yartey also examined both macroeconomic and institutional factors influencing stock market development in 42 emerging economies including South Africa, using a panel data and adopting a generalized method of moment (GMM), and found that macroeconomic factors such as income level, gross domestic investment, banking (or financial) sector development, private capital flows, and stock market liquidity are important correlates of stock market development in emerging countries markets.


In a similar study, Garcia and Liu (1999) used pooled data from fifteen industrial and developing countries (Latin America and Asia) from 1980 to 1995 to examine the macroeconomic determinants of stock market development, in particular, market capitalization. The study used real income, savings rate, financial intermediary development, and stock market liquidity as the variables determining stock market capitalization. They found that stock market development and financial intermediary development are complements rather than substitutes. In addition, they found GDP growth, investment and financial intermediary sector development to be important factors. However, Naceur, Ghazouani, and Omran (2005) using an unbalanced panel data from twelve Middle East and North Africa (MENA) region countries in estimating a fixed and random effects specification found financial intermediary development and stock market liquidity to be significant factors.


Adam and Tweneboah (2008) used Databank Stock Index (DSI) as a dependent variable for stock market development in Ghana, while inward foreign investments, the treasure bill rate (as a measure of interest rate), the consumer price index (as a measure of inflation), average crude oil prices, and the exchange rate served as independent variables. Using quarterly data for the above variables (from 1991:1 to 2007:4) and employing co-integration test procedures they found co-integration between macroeconomic variable and stock prices in Ghana indicating long-run relationship. Their vector error correction model showed that the lagged values of interest rate and inflation have a significant influence on the stock market. The inward foreign direct investments, the oil prices, and the exchange rate demonstrated weak influence on price changes. In terms of policy implication, they concluded that the DSI was not informational-efficient with respect to interest rate, inflation, inward FDI, exchange rate and world oil prices.


In Nigeria, most studies on stock market growth or development have focused on the relationship between stock market and economic growth (Anyanwu, 2005; Ogun and Iyoha, 2005; Nyong, 1997; Obadan, 1998; Onosode, 1998; Oyejide, 1994). The few that have concentrated on analyzing the macroeconomic factors that influence stock market development (Akpan, Inya-agha and Aya, 2011; Daferighe and Charlie, 2012) have limited themselves to the use of narrower measures of stock market development as earlier indicated in this introductory section. In addition, their adopted methodology, the ordinary least squares technique, which apart from not being able to address the possibility of a long-run equilibrium relationship, is also subject to bias of time series data used in the regression, spurious estimates as well as high standard errors of the regression (Granger and Newbold, 1974).


An examination of the empirical literature indicates that macroeconomic variables such as income level, gross domestic investment, banking and financial sector development, private capital flows, stock market liquidity, savings rate and macroeconomic stability policies (including interest, exchange and inflation rates), impact on stock market development variables (Beck and Levine, 2003; Levine and Zervos, 1998; Singh, 1997; Yartey, 2008; Wachtel, 2003). The availability of data on these variables for Nigeria

provides an opportunity to test the relevance of the variables as possible factors influencing Nigeria’s stock market development.


This study therefore attempts to contribute to the gap in empirical literature on the comprehensive set of factors that determine stock market development in Nigeria. Specifically, we seek to examine the extent to which real gross domestic product, financial sector development, inflation rate, stock market liquidity, national savings rate and gross fixed capital formation influence stock market development. By doing this, we explore whether the same range of macroeconomic variables that impact stock market development in advanced economies hold for a developing country like Nigeria. Additionally, we set out to examine if the Structural Adjustment Programme (SAP) introduced in Nigeria in the mid-1980s had any structural change effects on macroeconomic variables associated with stock market development. This phenomenon has rarely been studied for Nigeria using the Chow Stability test. By employing the Engel and Granger co-integration and error correction technique, we minimize the possibility of spurious regression and biased estimates from the variables we test. The results of this study will be particularly useful for the development of the national stock market since the significant macroeconomic factors that will be identified can be given better or more appropriate attention by Nigerian economic policy makers.


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