Dynamic Research Journals (DRJ)

Journal of Economics and Finance (DRJ-JEF)

Volume 1 ~ Issue 2 (November, 2016) pp: 14-18
www.dynamicresearchjournals.org

Macroeconomic Policy Dynamics and Stock Market Performance:

Post-democratic Nigeria Perspective
1
Dr. Oleka, Chioma & 2Obiekwe, Chinelo Jenevive
1Lecturer, Enugu State University of Technology (ESUT), Enugu State
2Lecturer, Michael Okpara University of Agriculture Umudike (MOUAU), Abia State

Received 30 October, 2016; Accepted 01 November, 2016; Published 07 December, 2016 The
author(s) 2016. Published with open access at www.dynamicresearchjournals.org

Abstract: - The study investigated the relationship between macroeconomic policy dynamics and stock market
performance in Nigeria especially since Nigeria kick-started its democratic rule. Macroeconomic policy dynamics
adopted in the study include exchange rate dynamics, interest rate dynamics and inflation rate dynamics and efforts
were made to find out how policies relating to these macroeconomic variables affect market capitalization in the
Nigerian Stock Exchange. Data were collected from the Central Bank of Nigeria Statistical Bulletin and the study
employed the Ordinary Least Squares (OLS) regression method as the empirical tool. Findings revealed that
government policies on exchange rate and interest rate significantly affect stock market performance in Nigeria.
However, government policy on inflation rate does not have significant effect on stock market performance in
Nigeria. The study recommends that government should formulate and implement policies not in isolation but in
collaboration with stock market operators in order to create an enabling environment that would increase the
performance of the stock market in Nigeria.
Keywords: Macroeconomic Policy Dynamics, Stock Market Performance, Post-Democratic, Market Capitalization

1.1 Introduction
When government makes policies, it is often aimed at achieving positive results such as stability, economic
growth, and employment amongst others (Abata, Kehinde & Bolarinwa, 2012). Despite the good intentions of
government, not all policies of government end up actualizing the desired effect. While some of the policies may
have positive effect on some sectors of the economy, others may have adverse effect on other segments of the
society. For instance, a policy targets at increasing interest rate will not have equal and same effect on every
segment of the economy. While it may bring higher profitability to some, it may also lower the profitability of
others.
In Nigeria, the government has over the years tinkered with the various macroeconomic variables. This has
brought so much volatility (instability) to these variables. Available data shows that within the democratic
experience in Nigeria from 1999 to 2014, Nigerias currency has being consistently devalued from N 92.34/$ in
1999 to N 156.48/$ in 2014 (with various degrees of volatilities in-between) (CBN, 2014). In the same period,
interest rate fluctuated from 18 percent to 12.25% in 1999 and 2014 respectively. Inflation rate also fluctuated from
14.53% in 1999 to 8% in 2014 (CBN, 2014). Given the above statistics, one then wonders how these
macroeconomic dynamics affect the fortunes of the Nigerian Stock Exchange.

1.2 Statement of the Problem

Political interference in key policy making and implementation in Nigeria has been identified as the main
challenge hindering economic sectors in Nigeria from attaining desired performance. The stock market in Nigeria
has not been spared this harrowing experience as this politicking has often made policy makers tilt towards policies
that may be detrimental to their operation and performance.

1.3 Objectives of the Study

The major objective of the study was to investigate the relationship between macroeconomic variables
fluctuations and Stock Market performance in Nigeria. The specific objectives of the study include the following:

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 Macroeconomic Policy Dynamics and Stock Market Performance: Post-Democratic Nigeria Perspective

(i) To investigate the effect of exchange rate on market capitalization of the Nigerian Stock Exchange.
(ii) To investigate the effect of interest rate on market capitalization of the Nigerian Stock Exchange.
(iii) To investigate the effect of inflation rate on market capitalization of the Nigerian Stock Exchange.

1.4 Research Questions

Given the specific objectives, the study attempts to provide answers to the following questions:
(i) To what extent does exchange rate dynamics affect market capitalization of the Nigerian Stock
Exchange
(ii) To what extent does interest rate dynamics affect market capitalization of the Nigerian Stock Exchange
(iii) To what extent does inflation rate dynamics affect market capitalization of the Nigerian Stock
Exchange

1.5 Research Hypotheses

Three hypotheses were tested in the study and they include the following:
(i) H0: Exchange rate dynamics do not affect market capitalization of the Nigerian Stock Exchange.
(ii) H0: Interest rate dynamics do not affect market capitalization of the Nigerian Stock Exchange.
(iii) H0: Inflation rate dynamics do not affect market capitalization of the Nigerian Stock Exchange.

2. Empirical Review
Some studies have been carried out on finding the relationship between macroeconomic variables and stock
market performance both in developed and developing nations. For instance, Islam (2003) investigated both the
short run and long run equilibrium relationship between macroeconomic variables such as interest rate, exchange
rate, inflation rate and industrial productivity; and stock market performance in Malaysia. The study revealed a
significant short run and long run relationship among the macroeconomic variables and the Kuala Lumpur Stock
Exchange (KLSM) performance. Kandir (2008) investigated the effect of macroeconomic factors on stock returns in
Turkish Stock Market. The study adopted growth rate of industrial production index, change in consumer price
index, growth rate of narrow money supply, change in exchange rate, interest rate and growth of international crude
oil price as the macroeconomic factors. These macroeconomic factors served as the independent variables while
stock returns served as the dependent variable. The study period covers 1997 to 2005 and findings revealed that
exchange rate, interest rate and world market returns have significant effect on all the stock market returns measures.
On the other hand, inflation rate had only significant effect on three out of the twelve (12) stock market returns
measures while industrial production, money supply and international crude oil prices had no significant effect on
any of the stock market returns measures adopted in the study. Wongbanpo and Sharma (2002) investigated the
relationship between the stock returns for five (5) ASEAN countries and five macroeconomic variables. Findings in
the study revealed that all the five stock price indexes had positive relationships with growth in output and negative
relationship with aggregate price level. Alagidedea and Panagiotidis (2010) examined the relationship between stock
price and inflation in selected African stock markets. Findings revealed that for South Africa the elasticity of the
stock price with respect to the consumer price index is 2.264 and that the stock price had a temporary negative
relationship with consumer price in the short run and a positive relationship in the long run. The study concluded
that stock prices are a hedge against inflation in the long run.
On the home front, Osuagwu (2009) investigated the effect of macroeconomic variables on the
performance of stock market in Nigeria from 1984 to 2007. The study adopted broad money supply, exchange rate,
consumer price index, minimum rediscount rate and treasury bills as the proxies for macroeconomic variables. The
study employed the Ordinary Least Squares method and Engle-Granger two step error correction models to examine
the impact of the macroeconomic variables on stock market returns in Nigeria. Findings revealed that stock market
performance are significantly determined by broad money supply, exchange rate and consumer price index both in
the short run and long run. However, minimum rediscount rate and treasury bills revealed mixed results and
insignificant relationship with stock market returns. Abraham (2010) investigated the relationship between stock
reaction and macroeconomic variables in the Nigerian economy. The study adopted inflation rate, interest rate and
exchange rates as the independent variables and proxies for macroeconomic variables while the All Share index was
employed as the dependent variable and proxy for stock market performance. The study employed the unit root test,
cointegration test and error correction models as the analytical tools. Findings revealed that a significant short run
relationship exists between the stock market returns and minimum rediscount rate (interest rate) and exchange rate
stability had significant effect on stock market performance in Nigeria. However, treasury bills and inflation rate
exhibited negative but insignificant effect on stock market performance in Nigeria. Oseni and Nwosa (2011)
analyzed the relationship between stock market volatility and macroeconomic variables volatility in Nigeria from

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 Macroeconomic Policy Dynamics and Stock Market Performance: Post-Democratic Nigeria Perspective

1986 to 2010. The study employed Generalized Autoregressive Conditional Heteroscedasticity (GARCH) approach
as the analytical tool. Findings revealed that there exists a bi-causal relationship between stock market volatility and
real GDP volatility in Nigeria. More so, the result showed that there exists no causality between stock market
volatility and volatility in interest rate and inflation rate.

3. Research Methodology
The study relied on the ex-post facto research design in order to investigate the effect of macroeconomic
variables on stock market performance in Nigeria. The ex-post facto design enabled the researcher to make use of
already existing data on the variables of interest (Osuala, 2010). In line with Osuagwu (2009) with modifications,
the model for the study is specified as:
MCAP = (EXCHR, INTR, INFR) (1)
Transforming equation (1) into its linear econometric form yields
MCAP = 0 + 1EXCHR + 2INTR + 3INFR + (2)
Where;
MCAP = Market capitalization (proxy for stock market performance)
EXCHR = Exchange rate (proxy for exchange rate dynamics)
INTR = Interest rate (proxy for interest rate dynamics)
INFR = Inflation rate (proxy for inflation rate dynamics)
0 = Constant term
1, 2 and 3 = Coefficient parameters of the explanatory variables
= Stochastic error term
By a priori, 0 > 0, 1 < 0, 2 < 0 and 3 < 0

4. Data Analysis and Findings

Table 1: Ordinary Least Squares (OLS) Result
Dependent Variable: LNMCAP
Method: Least Squares
Date: 10/25/16 Time: 13:08
Sample: 1999 2015
Included observations: 17

Variable Coefficient Std. Error t-Statistic Prob.

C -8.734419 5.764766 -1.515139 0.1537

LNEXCHR 4.756783 1.010091 4.709264 0.0004
LNINTR -1.972576 0.613569 -3.214924 0.0068
LNINFR -0.584640 0.576242 -1.014573 0.3288

R-squared 0.791638 Mean dependent var 8.277561

Adjusted R-squared 0.743554 S.D. dependent var 1.374483
S.E. of regression 0.696045 Akaike info criterion 2.315519
Sum squared resid 6.298222 Schwarz criterion 2.511570
Log likelihood -15.68191 Hannan-Quinn criter. 2.335007
F-statistic 16.46378 Durbin-Watson stat 1.352666
Prob(F-statistic) 0.000103

Critical values:
(a) t-statistic, t0.05 = 1.746
(b) F-statistic, F0.05 (3, 13) = 3.41
Source: Authors computation using E-views 8.0

The result shown in table 1 above was analyzed based on the economic, statistical and econometric criteria.
First, the result reveals that there is a positive and significant relationship between exchange rate dynamics and
market capitalization (proxy for stock market performance) in Nigeria. From the result, one percent increase in
exchange rate leads to 4.76 percent increase in market capitalization (stock market performance) in Nigeria. The

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 Macroeconomic Policy Dynamics and Stock Market Performance: Post-Democratic Nigeria Perspective

probability value of exchange rate (0.0004) is less than the test significant level (i.e. P < 0.05) and with this we
conclude that exchange rate dynamics have significant effect on stock market performance in the Nigerian Stock
Exchange. This finding corroborates Adaramola (2012) which found a positive and significant relationship between
exchange rate volatility and stock market returns in Nigeria in the short run. This outcome may be attribute to the
fact that Nigerias economy is imported dependent and exchange rate fluctuations increases the returns of trading
firms/multinationals who capitalize on this fluctuation. With increased returns, investments made by these firms
increase thereby increasing the stock market performance since part of the investment may have been made in
stocks.
Interestingly, the result reveals that there exists a negative and significant relationship between interest rate
dynamics and market capitalization (proxy for stock market performance) in Nigeria. From the result, one percent
increase in interest rate leads to 1.97 percent decrease in market capitalization in Nigeria. The probability value of
interest rate (0.0068) is less than the test significant level (i.e. P < 0.05), thus, we conclude that interest rate
dynamics have significant effect on stock market performance in Nigeria. This finding corroborates Osamwonyi and
Evbayiro-Osagie (2012) that found a negative and significant relationship between interest rate and stock market
performance in Nigeria. This outcome is in line with economic theory and may be attributed to the high interest rate
existing in Nigeria which had made sources of finance (such as borrowing) unaffordable. With increased cost of
borrowing and its resultant portfolio effects, investments especially in stocks decline.
The result shows that there exists a negative and insignificant relationship between inflation rate and stock
market performance in Nigeria. This result conforms to economic theoretical expectation and indicates that as
inflation rate increases, stock market performance decreases. From the result, one percent increase in inflation rate
leads to 0.58 percent decrease in market capitalization (proxy for stock market performance) in Nigeria. The
probability value of inflation rate (0.3288) in absolute term is greater than the test significant level (i.e. P > 0.05) and
with this we conclude that inflation rate dynamics have significant effect on stock market performance in Nigeria.
This finding concurs with Terfa (2010) that inflation rate has a negative and insignificant relationship with stock
market performance in Nigeria. Perhaps, this result can be attributed to the erosion of real value of financial assets in
periods of high inflation. In Nigeria, despite the efforts of the government to curb inflationary pressures, high
inflation has persisted. With the existence of high inflation rate, wealth holders have resorted to investing in real
estate instead of financial assets thereby causing a decline in stock market performance in Nigeria.
The coefficient of determination (adjusted R-squared) shows that 74 percent of the variations in stock
market performance (proxied by market capitalization) in Nigeria are due to exchange rate, inflation rate and interest
rate dynamics. Thus, the remaining 26 percent of the variations in stock market performance may be attributed to
other factors not included in the model. The computed F-statistic (16.46) exceeds the critical (tabulated) F-statistic
(3.41) and this indicates that the model adopted in the study is reliable as well as significant. Thus, it can be relied
upon for policymaking.
Finally, the Durbin Watson statistic (1.35) did not fall within the permissible region and suggests that there
may be presence of autocorrelation. Above, the Durbin-Watson statistic being greater than the R-squared shows that
the regression result is not spurious.

5.1 Conclusion
The study investigated how macroeconomic policy dynamics of government affect stock market
performance in Nigeria. In order to achieve this broad objective the study adopted three measures of macroeconomic
policy dynamics namely exchange rate dynamics, interest rate dynamics and inflation rate dynamics (all served as
the explanatory variables) while market capitalization was used to measure stock market performance (and served as
the dependent variable). Findings revealed that both exchange rate and interest rate dynamics significantly affect
stock market performance in Nigeria while inflation rate has no significant effect on stock market performance in
Nigeria.

5.2 Recommendations
The following recommendations are made in line with the research findings:
(i) Government should make a guided policy on interest rate by fashioning out ways of reducing the
interest rate to a single-digit threshold in order to reduce its unproductive effect on the stock market
performance in Nigeria.
(ii) Government policy towards exchange rate should be closely monitored to check against any distortions
that it might inflict on the stock market in the long run. Hence, efforts should be made to bring stability
in Nigerias exchange rate regime.

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 Macroeconomic Policy Dynamics and Stock Market Performance: Post-Democratic Nigeria Perspective

(iii) Government should create an enabling environment for the increased performance of the stock market
in Nigeria by formulating as well as implementing favourable policies on its key macroeconomic
variables. This can be achieved through pre-policy interactions between government and stock market
operators.

References
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theoretical Exploration. International Journal of Academic Research in Economics and Management Sciences, 1(5): 75 88.
[2]. Adaramola, A. O. (2012). Exchange rate volatility and stock market behavior: The Nigerian experience. European
Journal of Business and Management, 4(5):31-39
[3]. Alagiededea, P.,& Panagiotidis, T. (2010). Can common stock provide hedge against inflation? Evidence from African
countries. Review of Financial Economics, 19, 91 -100
[4]. CBN (2014). Central Bank of Nigeria Statistical Bulletin: CBN, Abuja.
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[8]. Oseni, I. O., & Nwosa, P. I. (2011). Stock market volatility and macroeconomic volatility in Nigeria: An exponential
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[10]. Terfa, W. A. (2010). Stock market reaction to selected macroeconomic variables in the Nigerian economy. CBN
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[11]. Wongbanpo, P., & Sharma, S. C. (2002). Stock market and macroeconomic fundamental dynamic interactions:
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