The Impact of Macroeconomic Variables on Stock Prices in Nigeria.
A Thesis Submitted to the School of Postgraduate Studies, University of Lagos.
This study investigates the impact of macroeconomic variables on stock prices in Nigeria. Since most of the previous studies in this area did not consider the topic at the individual firm’s level, the work therefore made an attempt to unravel the complex relationship between stock prices and macroeconomic variables at the market level as well as at the individual firm’s level. Secondary data on stock prices of selected firms, Nigerian Stock Exchange (NSE) stock price index and six macroeconomic variables between 1985:1 and 2009:4 were used for the analysis. The macroeconomic variables used in the research work were: money supply (BRDM), interest rate (INTR), exchange rate (ECHR), inflation rate (INF), oil price (OIL) and gross domestic product (GDP). The work was considered at two different levels using two separate models for the estimations. At the firm’s (microeconomic) level, a panel model was used to examine the impact of macroeconomic variables on stock prices of the selected firms in Nigeria. This model was considered appropriate for its ability to combine both time series and cross-sectional data. At the market (macroeconomic) level, the Johansen co-integration technique was used to determine whether there is a long run dynamic relationship between stock prices and macroeconomic variables in Nigeria. The empirical findings of the study revealed that macroeconomic variables have strong significant impacts on stock prices both at the market level and at the individual firm’s level in Nigeria. The results are useful and indicate a strong linkage among the macroeconomic variables and stock prices. The respective null hypotheses which state that money supply, exchange rate, interest rate, oil price and gross domestic product do not have any significant impact on stock prices were rejected at 5% level of significance. The study also revealed that there is a long run relationship between macroeconomic variables and stock prices in Nigeria. Arising from the causality test, with exception of oil price, there was no sufficient information that causation exists between stock prices and the selected macroeconomic variables. This implies that the macroeconomic variables are not good predictors of stock prices in Nigeria. The lack of causation agrees with theories on security pricing. Theories emphasize an indirect channel of influence between macroeconomic variables and stock prices. Given the indirect channel of influence, the study therefore concluded that the choice of an appropriate monetary policy which guarantees better management of exchange rate, interest rate, money supply and steady economic growth will significantly impact stock prices in Nigeria.