A Time Series Analysis of the Nexus Between Macroeconomic Fundamentals and Stock Prices in Nigeria

Open access


Since macroeconomic fundamentals have been found to play a vital role for changes in the economy of a country. Consequently, the onus is on the appropriate regulatory authorities to take measures in making amendments in these policies to put the economy on the right development track. The aim of this study is to use time series analysis to empirically showcase the nexus between macroeconomic fundamentals and stock prices in Nigeria. The method used for this study was the Co-integration test and the EGARCH technique to estimate the possible influence of the selected macroeconomic fundamentals on stock prices. Volatility was captured by using quarterly data and estimated using GARCH (1,1) respectively. The study found there is a positive relationship between macroeconomic factors and stock prices in Nigeria. Therefore, the study recommends that the Federal authority should put in place policy measures that will enable the exchange rate to be relatively stabilized. This is because empirical evidence from studies has shown that exchange rate affects stock market prices. In addition, the government authority should ensure an enabling environment that would build the mindset of institutional investors in the Nigerian stock market due to the existence of information asymmetry problems among potential investors.

Adam, A. M. and Tweneboah, G. (2008). Macroeconomic factors and stock market movement: Evidence from Ghana. Munich Personal RePEc Archive, No. 14079.

Ahmad, A. U., Abdullah, A., Abdullahi, A. T., Aziz, U. A. & Muhammad (2015). Stock Market Returns and Macroeconomic Variables in Nigeria: Testing for Dynamic Linkages with a Structural Break, Scholars Journal of Economics, Business and Management, ISSN 2348-8875, Vol. 2 No 8A, pages 816-828

Akinifesi, O. (1987). The Role and Performance of the Capital market in Adedotun Philips and Eddy Ndekwu (eds) Economic Policy and Development in Nigeria NISER, Ibadan Nigeria.

Akinlo, O. O. (2015). Impact of foreign exchange reserves on Nigerian Stock Exchange, International Journal of Business and Finance Research, ISSN: 1931-0269, Vol. 9, No. 2, pages 69-76.

Alatiqi, S. and Fazel, S. (2008), “Can Money Supply Predict Stock Prices? Journal for Economic Educators, 8(2), fall 2008. 222-227.

Bhattacharya, B. & Mookherjee, J. (2001).Causal relationship between and exchange rate, foreign exchange reserves, value of trade balance and stock market: Case study of India. Working paper, Jadavpur University Department of Economics, Kolkata, India. Retrieved from http://www.igidr.ac.in/money/mfc_5/basabi.pdf

Chen, N. F., Roll, R. and Ross, S. A (1986). Economic forces and the stock market. Journal of Business, 59, 383-403. Retrieved July 23, 2011, from http://www.anderson.umich.edu.

Dagadu, S. (2010). The effect of Macroeconomic variables on stock market performance: A case study of Ghana. IMF Country Report No.9/256. Retrieved June 5, 2011, from www.scribd.com/doc/46104408

Doong, Y., Shuh-Chyi, Z., Yang, Y. Z., Sheng-Yung, W., Wang, T. Z. and Alan, T. (2005), “The Dynamic Relationship and Pricing of Stocks and Exchange Rates” Empirical Evidence from Asia Emerging Markets. Journal of American Academy of Business, Cambridge 7, 118-123.

Duca, G. (2007). The Relationship between the Stock Market and the Economy: Experience from International Financial Markets. The Bank of Valletta Review, No. 36, pp. 1-

Fama, E. F. (1970). Efficient Capital Markets: A review of theory and empirical work, Journal of Finance, 25: 383-417.

Fama, F. and Schwert. (1977). Stock Returns, Real Activity, Inflation, and Money. The American Economic Review. 71(4) 545-565

Firth, M. (1979), The Relationship Between Stock Market Returns and Rates of Inflation‟, The Journal of Finance, Vol. 34, No. 3, pp. 743-749 [Online] Available at: http://www.jstor.org/stable/2327440 [Accessed 28 June 2009].

Gay, R. D. (2008). Effect of macroeconomic variables on stock market returns for four emerging economies: Brazil, Russia, India, and China. International Business and Economics Research Journal, 7(3), 01-08.

Geetha, C., Mohidin, R., Chandran, V.V., and Chong, V. (2011), The Relationship between Inflation and Stock Market: Evidence from Malaysia, United States and China, International Journal of Economics and Management Sciences, Vol. 1(2), pp. 01-16.

Gjerde, O. and Saettem, F. (1999), Causal Relations Among Stock Returns and Macroeconomic Variables in a Small, Open Economy, Journal of International Financial Markets, Institutions and Money, 9, 61–74.

Goswami, G. and Jung, S. C. (1997). Stock Market and Economic Forces: Evidence from Korea. IMF Working Paper. From <http://papers.ssrn.com/sol3/Delivery.cfm?abstractid=1937914> (Retrieved on April 6, 2012)

Granger, C. W. J. and Newbold, P. (1974),”Spurious regressions in econometrics”, Journal of Econometrics vol.2 (2): pp 111–120.

Grossman, S. J. and Shiller, R. J. (1981), The Determinants of The Variability of Stock Market Price, The American Economic Review 71(2), :.222-227.

Habibullah, M. and Baharumshah A. Z. (1996), Money, Output and Stock Prices in Malaysia: An Application of the Cointegration Tests. International Economics Journal 10(2):121-130.

Hamburger, M. J. and Kochi, L. A. (1972). Money and Stock Prices: The Channel of Influence. Journal of Finance, December, pp 1056-1066.

Ibrahim, M. H. (1999). Macroeconomic Variables and Stock Prices in Malaysia: An Empirical Analysis. Asian Economic Journal, Vol. 13, No. 2, pp. 219-231.

Johansen, S. and Juselius, K. (1990). Maximum Likelihood Estimation and inference on Cointegration with application to the Demand for Money, Oxford Bulletin of Economics and Statistics, 52 (2): 169-210.

Johansen, S. and Juselius, K. (1992) Testing Structural Hypotheses in Multivariate Cointegration Analysis of the PPP and UIP for UK. Journal of Econometrics, 53: 211 – 244.

Kaul, G. (1987), Stock Returns and Inflation: The Role of the Monetary Sector, Journal of Financial Economics, Vol, 18, No.2, pp. 253-276.

Khan, K. & Ahmed, I. (2015). Impact of Stock Prices on Macroeconomic Variables: Evidence from Pakistan, KASBIT Business Journal (KBJ), Vol. 8, No.1, pages 42-59.

Khan, M. S. (2014). Macroeconomic Variables & its Impact on KSE 100 Index, Universal Journal of Accounting and Finance, Vol. 2 Issue 2, pages 33-39,

Khan, W. A., Javed, M. A., Shahzad, N., Sheikh, Q., Saddique, S., Riaz, M., & Batool, S. (2014). Impact of Macroeconomics variable on the Stock Market index; A Study from Pakistan. International Journal of Accounting and Financial Reporting, 4(2), Pages-258.

Linter, C. J. (1973). In: Quality control in the Pharmaceutical Industry (Cooper, M.S., Ed.), Volt, Academic Press, New York, pp 191-192.

Liu, L. Li. Y. and Hu, X. J (2006). Relationship between economy and stock market in China. Special Zone Economy, 76-77. Retrieved June 14, 2011, from http://www.kcmi.re.kr.

Liu, M. and Shrestha, K. (2008). Analysis of the long term relationship between Macroeconomic variables and the Chinese stock market using heteroscedastic cointegration. Journal of Managerial Finance, 34(11):744-755.

Maysami, R. C., Howe, L. C., and Hamzah, M. A. (2004), relationship between Macroeconomic Variables and Stock Market Indices: Cointegration Evidence from Stock Exchange of Singapore‟s All-S Sector Indices‟, Journal Pengurusan Vol. 24, pp. 47-77 [Online] Available at: http://pkukmweb.ukm.my/~penerbit/jurnal_pdf/Jp24-03.pdf [Accessed 9 February 2009].

Maysami, R. C. & Koh, T. S. (2000). A Vector Error Correction Model of the Singapore Stock Market. International Review of Economics and Finance, 9, 79–96. Monthly Reviews of Dhaka Stock Exchange, January 2000-Feb 2007.

Mohammad, B. A. (2011) “Co-integration relation between Macroeconomic Variables and stock return: Evidence from Dhaka Stock Exchange (DSE)”, International Journal of Business and Commerce Vol. 1 No.2, pp 25-38.

Mohanamani and Sivagnanasithi (2014). Indian Stock Market and Aggregate Macroeconomic Variables: Time Series Analysis. Journal of Economics and Finance (IOSR-JEF)., e- ISSN: 2321-5933, p-ISSN: 2321-2925. 3(6), pp 68-74

Mukherjee, T. K. and Naka, A. (1995) Dynamic Relations between Macroeconomic Variables and the Japanese Stock Market: An Application of vector error correction model. The Journal of Financial Research, 18(2), 223-237.

Nelson, D. B. (1991), Conditional Heteroscedasticity in Asset Returns: A New Approach. Econometrica. 59, 347–370.

Nijam, HM., Ismail, SMM. & Musthafa, AMM. (2015). The Impact of Macroeconomic Variables on Stock Market Performance; Evidence from Sri Lanka, Journal of Emerging Trends in Economics and Management Sciences, (ISSN: 2141-7024), Vol. 6, Issue 2, pages 151-157.

Nkechukwu, G., Onyeagba, J. & Okoh, J. (2013). Macroeconomic Variables and Stock Market Prices in Nigeria: A Co-integration and Vector Error Correction Model Tests, International Journal of Science and Research (IJSR), ISSN (Online): 2319-7064, Volume 4 Issue 6, pages 717-724. of Finance, 25: 383-417.

Ogiji, F. O. (2013). An empirical analysis of the effect of broad money supply on the stock market returns in Nigeria. International Journal for Management Sciences and Technology, 1(6), 1-13. Retrieved from www.ijmst.com

Osamwonyi, I. O. & Michael, C. I. (2014). The impact of macroeconomic variables on the profitability of listed commercial banks in Nigeria, European Journal of Accounting Auditing and Finance Research, Vol.2, No.10, pages 85-95.

Osamwonyi, I.O. (2003). Forecasting as a Tool for Securities Analysis, A Paper Presented at a Three-day Workshop on Introduction to Securities Analysis. Organized by Securities and Exchange Commission, Lagos, August 17th.

Ozbay, E. (2009), “The Relationship between Stock Returns and Macroeconomic Factors: Evidence from Turkey”, 1-72, M.Sc Thesis on Financial Analysis and Fund Management Exeter University Retrieved from http://www.gov.tr/displayfile&pageid=61&fn=61.pdf

R. B. Khodaparasti (2014). The role of macroeconomic variables in the stock market in Iran, Polish Journal of Management Studies, Vol. 10, No 02, pages 54-64.

Ross, S. A. (1976). The Arbitrage Theory of Capital Asset Pricing, Journal of Economic Theory, 13: 341-360.

Sarbapriya, Ray (2012) “Foreign Exchange Reserve and its Impact on Stock Market Capitalization: Evidence from India”, Research on Humanities and Social Sciences, Vol.2, No.2, 2012.

Sellin, P. (2001), “Monetary Policy and the Stock Market: Theory and Empirical Evidence” Journal of Economic Surveys, 15(4) pp 491 – 541.

Singh, P. (2014).Indian stock market and macroeconomic factors in scenario, International Journal of Research in Business Management, ISSN(P): 2347-4572, Vol. 2, Issue 11, pages 43-53.

Smith, G. (1990). Investments, Illinois & London: Glenview

Suliaman, D. M., Hussain, A. and Ali, A. (2009). Impact of macroeconomic variables on stock prices: Empirical evidence of KSE (Karachi Stock Exchange). European Journal of Scientific Research, 38(1), 96-103. Retrieved June 5, 2011, from http://www.eurojournals.com.

Uddin, M. G. S. and Alam, M. M. (2007). The Impacts of Interest Rate on Stock Market: Empirical Evidence from Dhaka Stock Exchange. South Asian Journal of Management and Sciences, 1(2), 123-132

Venkatraja, B. (2014). Impact of Macroeconomic Variables on Stock Market Performance in India: An Empirical Analysis, International Journal of Business Quantitative Economics and Applied Management Research, Vol.1, Issue 6, pages 71-85.

Wang, M. L., Wang, C. P. and Huang, T. Y. (2010). “Relationships among Oil Price, Gold Price, Exchange Rate and International Stock Markets, Journal of Finance and Economics, ISSN 1450-2887 Issue 47.

Wasseja, M. M., Njoroge, E. & Mwenda, S. N. (2015). Investigation of the Granger Causal Relationship between Macroeconomic Variables and Stock Prices in Kenya, International Journal of Business and Economics Research, ISSN: 2328-7543, Vol. 4, No. 3, pages 98-108.

Yunus, M. M., Mahyideen, J. M. & Saidon, R. (2014).Influences of macroeconomic variables on stock prices in Malaysia, International Conference on Postgraduate Research, (e-ISBN 978-983-3048-98-4), pages No. 399-416.