INFLATION AND STOCK MARKET RETURNS IN NIGERIA: AN EMPIRICAL ANALYSIS. A RESEARCH PROJECT MATERIAL ON BANKING AND FINANCE
ABSTRACT
This study examined empirically the impact of inflation on Nigerian stock market returns,within the period 1985 – 2012. The Ordinary Least Square (OLS) technique was utilized to empirically assess the impact of our modeled independent variable/regressor on our chosen dependent variable. The hypothesis that inflation significantly affects stock market returns was tested and validated with the results. Our findings gave rise to statistically significant t-statistics which further confirms the effect of the independent variable on the dependent variable. Some of the recommendations to further reduce any negative impact of inflation on stock market returns in Nigeria are more efforts at formulating and implementing favourable macroeconomic and investment friendly policies. Others include the expansion of the stock market in terms of depth and breadth, the attraction of foreign direct investment and foreign portfolio investment into the Nigerian economic landscape and the implementation of sound economic policies to further reduce the possible negative impact of macroeconomic variables like inflation on stock market returns.
CHAPTER ONE
BACKGROUND OF THE STUDY
A common problem plaguing the growth of developing countries like Nigeria is the shallow nature of its financial markets both in terms of breadth and depth. Indeed financial markets play an important role in the process of economic growth and development by facilitating savings and channeling funds from savers to investors. While there have been numerous attempts to develop the financial sector, emerging markets like that of Nigeria are also facing the problem of macroeconomic variable fluctuations and unpredictability in numerous fronts – arising from fluctuations in inflation, exchange rate and changing levels of financial openness – including volatility of its financial sector.
The degree of stock market return and volatility if known can help forecasters predict the path of an economy’s growth and attendant volatility levels. The structure of fluctuations and volatility can imply that investors now need to hold more stocks in their portfolio to achieve diversification. This case is more serious for relatively small (compared to developed economies) and emerging economies like Nigeria who is currently attempting to further deepen its financial sector by developing its securities market. Unlike mature stock markets of advanced economies, the stock markets of less developed economies like Nigeria began to develop rapidly only in the last two decades, and are sensitive to factors such as changes in the levels of economic activities, changes in the political and economic environment as well as changes in general macro economic variables.