STOCK MARKET CAPITALIZATION AND INTEREST RATE IN NIGERIA: A TIME SERIES ANALYSIS. A RESEARCH PROJECT MATERIAL ON BANKING AND FINANCE
This study examines the relationship between stock market capitalization rate and interest rate. Time series data obtained from Central Bank of Nigeria (CBN) and Nigerian Stock Exchange (NSE) were analyzed using simple linear regression. Results showed that the prevailing interest rate exerts positive influence on stock market capitalization rate. Government development stock rate exerts negative influence on stock market capitalization rate and prevailing interest rate exerts negative influence on government development stock. It was therefore recommended that the operators of the Nigeria capital market should raise the level of awareness so that investors will be abreast with the happening in the market.
1.1BACKGROUND OF THE STUDY
It is a known fact that the investment that promote economic growth and development requires long-term funding, or longer than the duration for which most savers are willing to commit their funds. Capital market is a collection of financial institutions set up for the granting of medium and long term loans. Government securities corporate bonds are also traded here in the market, investors provides long-term funds in a bid to secure long term financial assets offered by borrowers. The capital market is made up of two (2) types of market: the primary and secondary market.
The participants in the capital include: Nigerian Stock Exchange, Discount Houses, Development Banks, Investment Banks, Buildings Societies, Stock Broking Firms, Insurance and Pension Organization quoted firms, the government, individuals and the Nigerian Stock Exchange (NSE) savings and real investment is therefore encouraged through the operations of the capital market. This is because aggregate savings are channeled into real investment that increases capital stock and therefore economic growth of the country.
Capitalization rate is the discount rate used to determine the present value of future earnings. It is one of the major determinants of the market size of any stock exchange. The determination of this rate is based on the forces of demand and supply: interest rate is a part of the monetary policy. If interest’s rate paid by banks to depositor is increased, investors will patronize the banks the more and fewer investors will invest on the capital market. This will lead to a decrease in capital investment in the economy and hence economic growth and development will be lowered.