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THE IMPACT OF STOCK MARKET PERFORMANCE ON THE GROWTH OF NIGERIAN ECONOMY BY ALADE FEMI JOHN EC/2006/192 DEPARTMENT OF ECONOMICS FACULTY OF SOCIAL AND MANAGEMENT SCIENCES CARITAS UNIVERSITY AMORJI-NIKE, ENUGU TITLE PAGE THE IMPACT OF STOCK MARKET PERFORMANCE ON THE GROWTH OF NIGERIAN ECONOMY A PROJECT SUBMITTTED IN PARTIAL FULFILLMENT OF THE AWARD OF BACHELOR OF SCIENCE (B.Sc) IN ECONOMICS BY ALADE FEMI JOHN EC/2006/192 DEPARTMENT OF ECONOMICS FACULTY OF SOCIAL AND MANAGEMENT SCIENCES CARITAS UNIVERSITY AMORJI-NIKE, ENUGU STATE APPROVAL PAGE This project has been approved as satisfying the requirement of Department of Economics, Faculty of Management and Social Science, Caritas University Enugu for the award of Bachelor of Science (B.SC) Degree in Economics. …………………………… …………………… Mr. Ugwu Johnson Barr. P.C Onwudinjo Project Supervisor Head of Department Date ……………………… Date……………………….. ………………………………. …………………………. Dr. C.C Umeh External Examiner Dean of faculty Date………………………… Date……………………. DEDICATION I dedicate this work to Alpha and Omega, the beginning and the end. To the one I love most on earth, my Mother Mrs. Ireti Ketiku and to my father Engr. Duro Ketiku, and to my siblings for their love and care. ACKNOWLEDGEMENT I want to use this opportunity to say thank you to everyone who has made an impact in my life, everyone who has made me see life in a different light, and everyone one who has made me realize myself. With humility and a sense of obligation, I express my profound gratitude to all those who have directly or indirectly contributed to the success of this research project. I duly regard God Almighty for the spirit of might and of counsel, and also for his protection over me throughout my stay in Caritas. I also acknowledge the great visionary and pursuer of this dream, Very Rev. Fr. E.M.P Edeh, without him, Caritas University would not have been. I wish to express gratitude to my supervisor, Mr. Ugwu Johnson, who was neither weary nor tired throughout his supervision of this project. He also spared his congested time to vet the script and for his very helpful comments and suggestions. I also appreciate the effort of my present and past lecturers most especially Prof Onah, Prof. Udabah S.I, Dr Asogwa F.O, Dr Umeadi, Mr. Ojike R.O, Mrs. Okonkwo P.N, Mr. Agu S.V, Mr. Ogbonna I.C, Mrs. Uwajimogu N, and my H.O.D Barr. Onwudinjo P.C. My sincere gratitude goes to my loving mother Mrs. Ireti Ketiku, without her, I wouldn’t have being, also to my Father Mr. Duro Ketiku, Daddy you are wonderful. I also acknowledge my siblings, Toluwalope, Oluwasanmi, Oluwadolapo, Babakolade, and Olugbenro. Indeed, I am also indebted to my friends and roommates, most especially Paddy, Alex, Enesi, Tolulope, Soji, Ebuka, Bossan, Stanley, Titi, Stephen, loveth, Chucks, David, phenashus, John, and those I couldn’t mention, I love you all. Alade Femi John Caritas University, Amorji Nike, Enugu ABSTRACT This study is motivated primarily by the need to enhance capital accumulation from the stock market, being the long term end of the financial system. This study is an investigation of the impact of Nigeria stock exchange performance on the economic growth of Nigeria. To accomplish these objectives, an econometric methodology was adopted as a tool for testing the stated hypothesis. The ordinary least square was chosen as the estimation tool because of the advantages it has over other estimation technique considering the phenomenon under study. The result of the student - t test revealed that the coefficient for market capitalization, investment rate and real exchange rate are all statistical significant at 5 percent level of significance. But the coefficient of real interest rate were not statistically significant at 5 percent level of significance The R2 which is the coefficient of multiple determination also revealed that 99 percent of the variation in the dependent variable is caused by the variation in the explanatory variables. The F test result suggested that the model is statistically significant. Expansion and efficiency of the Nigerian Stock Market would also be realizable if the recommendations in this project are considered This study recommends that the financial sector should be fully liberalized for efficient functioning of the financial system, the activities of the Nigerian Stock Exchange should be made more transparent as this will bring bout confidence in the mind of investors and people will be encouraged to invest, and the Government should encourage Nigerians to take advantage of the Stock Market and save for investment growth and capital formation in Nigeria. TABLE OF CONTENT Title Page ……………………………………………………………….i Approval Page ……………………………………………………….ii Dedication ……………………………………………………………...iii Acknowledgement Abstract …………………………………………………iv …………………………………………….………………v-vi Table of Content ………………………………………………..vii-viii CHAPTER ONE 1.1 Background of the study ………………………………………1-10 1.2 Statement of the problem………………………………………10-11 1.3 Objectives of the study…………………………………………11 1.4 Hypothesis of the study………………………………………...11 1.5 Significance of the study……………………………………….12-13 1.6 Scope and limitation of the study………………………………13 CHAPTER TWO LITERATURE REVIEW 2.1 Theoretical literature…………………………………………..14-48 2.2 Empirical literature…………………………………………….48-56 CHAPTER THREE METHODOLOGY 3.1 Method of Evaluation…………………………………………..57-61 3.2 Model specification……………………………………………..61-63 3.3 Data required and source………………………………………..63 CHAPTER FOUR PRESENTATION AND ANALYSIS OF RESULT 4.1 ADF Test for stationery………………………………………64-66 4.2 Co integration test……………………………………………..66-67 4.3 Presentation of regression result……………………………...67-68 4.4 Interpretation of regression results……………………………68-70 4.5 Statistical criteria……………………………………………….71-74 4.6 Economic criteria……………………………………………….74-78 4.7 Evaluation of hypothesis……………………………………….78 CHAPTER FIVE SUMMARY, CONCLUSION AND POLICY RECOMMENDATION 5.1 Summary…………………………………………………….79-80 5.2 Conclusion………………………………………………….80-82 5.3 Policy Recommendation………………………………..….82-83 Bibliography………………………………………………….84-90 Appendix……………………………………………………..91-97 CHAPTER ONE 1.1 BACKGROUND TO THE STUDY Primarily, a stock market is the place where companies can raise money to make their businesses bigger and better. Companies raise money by selling shares or stocks to investors. At the same time, the stock market gives investors an opportunity to invest in these companies and benefit from any profit they can make. A stock market can also be called a capital or securities market as it encompasses the stock exchange, the branches, and the stockbrokers. An organized securities market requires a securities exchange, a securities commission or other regulatory agency, and intermediaries such as dealers, brokers, securities analysts, etc. Virtually all costs are borne by those who benefit. The intermediaries receive their fees from the issuers or investors to whom they provide a service. The stock market is usually funded through fees paid by investors and issuers; even the expenses of the securities commission may be partially paid for by registration fees rather than being a major burden on the government budget. Companies which go public are subject to continuous cost of providing financial information, transferring shares, paying dividends, and other aspects of shareholder relations. The stock market is the aspect of the financial system which mobilizes and channels long term funds for economic growth. The stock market embraces trading in both new issues (primary) and old issues of stocks (secondary). Securities are primarily of 2 types: debt and equity. Debt securities include federal government development stock (GDS), industrial loans, preference stocks, bonds e.t.c, while equity securities mainly concern ordinary stocks which impose higher liabilities on the holders. Portfolio investment in the capital market is the acquisition of financial assets (which includes stock, bonds, deposits, and currencies) from one country in another country. It is a form of investment that attempts to achieve a mixture of income and capital growth, it deals with an institutional arrangement involving the Securities and Exchange Commission (SEC), the Nigerian Stock Exchange (NSE), the operators, and the investors. Stock market is viewed as a medium to encourage saving, help channel savings into productive investment, and improve the efficiency and productivity of investment. The emphasis on the growth of stock markets for domestic resource mobilization has also been strengthened by the need to attract foreign capital in non- debt creating forms. A viable equity market can serve to make the financial system more competitive and efficient. Without equity markets, companies have to rely on internal finance through retained earnings. Large and well established enterprises are in a privileged position because they can make investment from retained earnings and bank borrowings, while new companies do not have easy access to finance. Without being subjected to the scrutiny of the stock market, big firms get bigger, and for the emerging smaller companies, retained earnings and fresh cash injections from the controlling shareholders may not be able to keep pace with the needs for more equity financing which only an organized market place could provide. The corporate sector would also be strengthened by the requirements of equity markets for the development of widely acceptable accounting standards, disclosure of regular, adequate, and reliable information. While closely held companies can camouflage poor investment decisions and low profitability, at least for a while, publicly held companies cannot afford this luxury. The availability of reliable information would help investors make comparism of the performance and long term prospects of companies; corporations to make better investment and strategic decisions; and provide better statistics for economic policy makers. The capital market in any country is one of the major pillars of long term economic growth and development. The market serves a broad range of clientele including different levels of government, corporate bodies, and individuals within and outside the country. For quite some time now, the capital market has become one of the means through which foreign funds are being injected into most economies, and so the tendency towards a global economy is more feasible/ visible there than anywhere else. It is, therefore, quite valid to state that the growth of the capital market has become one of the barometers for measuring overall economic growth of a nation. Historically, the financial sector in the developing world has been primarily bank based. But, in recent years, there has been a gradual shift to a more holistic approach which, alongside the banks, seeks to develop the securities market. Some of the strength of the securities market which makes them the focal point of the shifting emphasis is their ability to: 1. mobilize long term savings for financing long tenure investments; 2. provide risk capital (equity) to entrepreneurs; 3. encourage broader ownership of firms; and 4. Improve the efficiency of resource allocation through competitive pricing mechanisms. 5. Provision of alternative sources of finance other than taxation and foreign loan to fund public projects. Apart from these primary benefits, a developed securities market in the sense of efficient financial intermediation further brings additional gains to the economy. These gains arise through: 1. lower cost of equity capital for firms; 2. imposition of discipline on corporate managers as share prices react to right and wrong judgment in firm’s investment decisions; 3. existence of mechanisms for appropriate pricing and hedging against risk; and 4. Increased flow of funds to the domestic economy as international capital responds to the thriving stock market. The development of securities market could help to strengthen corporate capital structure (i.e. the composition of the capital of the firms) and efficient and competitive financial system. The stock market encourages savings by providing households with an additional instrument which may better meet their risk preferences and liquidity needs. In well-developed capital markets, share holding provides individuals with a relatively liquid means of sharing risks in investment projects. To the extent that securities and bonds are a viable and relatively secure form of investment with an attractive long term return, they serve two functions: 1. stocks provide an incentive to save and invest; and 2. Financial savings are promoted and domestic savings rate increase as a whole. Stock market development has an important role to play in economic development. Shahbaz and his friends (2008) argue that stock market development is an important wheel for economic growth as there is a longrun relationship between stock market development and economic growth. Stock market development has the direct impact in corporate finance and economic development. Gerald (2006) states that stock market development is important because financial intermediation supports the investment process by mobilizing household and foreign savings for investment by firms. It ensures that these funds are allocated to the most productive use and spreading risk and providing liquidity so that firms can operate the new capacity efficiently. A growing body of literature has affirmed the importance of financial system to economic growth. Financial markets, especially stock markets, have grown considerably in developed and developing countries over the last two decades. Claessens, et al (2004) states that several factors have aided in their growth, importantly improved macroeconomic fundamentals, such as more monetary stability and higher economic growth. General economic and specific capital markets reforms, including privatization of state-owned enterprises, financial liberalization, and an improved institutional framework for investors, have further encouraged capital markets development. Similarly Mishkin (2001) states that a welldeveloped financial system promotes investment by identifying and financing lucrative business opportunities, mobilizing savings, allocating resources efficiently, helping diversify risks and facilitating the exchange of goods and services. From the view point of Sharpe, et al (1999), stock market is a mechanism through which the transaction of financial assets with life span of greater than one year takes place. Financial assets may take different forms ranging from the long-term government bonds to ordinary shares of various companies. Stock market is a very important constituent of capital market where the shares of various firms are traded Trading of the shares may take place in two different forms of stock market. When the issuing firm sells its shares to the investors, the transaction is said to have taken place in the primary market but when already issued shares of firms are traded among investors the transaction is said to have taken place in the secondary market. Stock markets are very important because they play a significant role in the economy by channeling investment where it is needed and can be put to best (Liberman and Fergusson, 1998). The stock market is working as the channel through which the public savings are channelized to industrial and business enterprises. Mobilization of such resources for investment is certainly a necessary condition for economic take off, but quality of their allocation to various investment projects is an important factor for growth. This is precisely what an efficient stock market does to the economy (Berthelemy and Vardoulakis, 1996). Earlier research emphasized on the role of the banking sector in the economic growth of nation. In the past decade, the world stock markets surged, and emerging markets accounted for a large amount of this boom (Demirguc-Kunt and Levine (1996a). Recent research has begun to focus on the linkages between the stock markets and economic development. New theoretical work shows how stock market development might boost long-run economic growth and new empirical evidence supports this view. Demirguc-Kunt and Levine (1996a), Singh (1997), and Levine and Zervos (1998) find that stock market development is playing an important role in predicting future economic growth. In underdeveloped countries like Nigeria, the development and growth of stock markets have been widespread in recent times. Despite the size and illiquid nature of stock market, its continued existence and development could have important implications for economic activity. For instance, Pardy (1992) has noted that even in less developed countries capital markets are able to mobilize domestic savings and able to allocate funds more efficiently. Thus stock markets can play a role in inducing economic growth in less developed country like Nigeria by channeling investment where it needed from public. Mobilization of such resources to various sectors certainly helps in economic development and growth. Stock market development has assumed a developmental role in global economics and finance because of their impact they have exerted in corporate finance and economic activity. The role of financial system is considered to be the key to economic growth (Neupane, et. al. 2006). Paudel (2005) states that stock markets, due to their liquidity, enable firms to acquire much needed capital quickly, hence facilitating capital allocation, investment and growth. Stock market activity is thus rapidly playing an important role in helping to determine the level of economic activities in most economies Tuladhar (1996) states that financial markets are catalyst in the development of economy. The study further added that developed economies have highly sophisticated financial institutions. Over the past decade, many developing economies have established capital markets as they moved towards more liberal economic policies. These emerging markets have shown extraordinary growth with very high volatility, which have attracted many investors into these markets. 1.2 STATEMENT OF THE PROBLEM Mobilization of resources for national development has long been the central focus of development. To this end, various papers, research works, seminars, e.t.c. have been written and held to find the best way to mobilize resources for economic growth. It is now increasingly being recognized that the growth process of the Nigerian economy depends to a considerable extent on the effects of stock market. Whether this effect is positive or negative is a research problem to be solved. In the light of the research problems, the key question this study attempts to answer is: 1. Does the Stock Market Performance have an effect on the GDP? 2. What is the impact of change in investment links on the growth of Nigeria stock market? 1.3 OBJECTIVES OF THE STUDY The main objective of this study is to examine the role which the stock market plays in the growth process of the Nigerian economy. However, the specific objectives include: 1. To determine if the market capitalization can lead an economy to growth 2. To determine the impact of change in investment links on the growth of Nigeria’s stock Market. 1.4 HYPOTHESIS OF THE STUDY The hypothesis tested in this study is: H0: there is no significant impact of Stock Market performance on economic growth. HO: changes in investment links have no significant impact on the growth of Nigeria’s stock Market 1.5 SIGNIFICANCE OF THE STUDY Due to the fact that there are no viable equity markets, the capital structure of firms are generally characterized by heavy reliance on international finance and bank borrowings which tend to raise debt/ equity ratios. Thus, the development of an active market for stocks could provide an alternative to the banking system for both savers and users of funds. There are a lot of studies about the connection between stock prices fluctuations and economic growth as well as other economic variables which have detected that changes in stock prices reflect real economic situation. Economic growth through the changes in levels of real economic activities affects profitability and activity of firms. As a result, with changes in profitability prospects, expected earnings and dividends of shares, stock prices fluctuate (Fama, 1990; Ferson and Harvey, 1993; Cheung and Ng, 1998; Mauro, 2003; Ritter, 2004; Liu and Sinclair, 2008; Shahbaz et al., 2008). On the other hand, other studies have examined the impact of stock prices on macroeconomics indicators. According to the results of these investigations share prices fluctuations play a role in directing economic activities in the medium and long term. Stock prices reflect the expectation of public towards the future economic activity. In other words, the stock market is forwardlooking and stock prices reflect anticipations about future economic activity. If a recession is expected, for example, then stock prices reflect this by decreasing in value whereas large increase in stock prices may reflect the expectation towards future economic growth (Jefferis and Okeahalam, 2000; Nasseh and Strauss, 2000; Mauro, 2000; Shirai, 2004; Adajaski and Biekpe, 2005; Mun et al., 2008). This work represents an attempt to close the gap between these different literatures, by examining the impact of stock market performance on the growth of Nigeria economy. 1.6 SCOPE AND LIMITATIONS OF THE STUDY This study appraises the performance of the stock exchange in consonance with its impact on the success or failure of the Nigerian economy. The scope of the study is based on the Nigerian stock exchange from the key sectors of the economy. The study examines the performance level over a 28 year period (19802007). The reason being that, a study period this long will, probably, reduce any form of bias in the results of estimate CHAPTER TWO ` LITERATURE REVIEW 2.1.0 THEORETICAL LITERATURE The capital market, as a strong avenue for wealth creation, plays a key role in economic growth and development. The distribution of the wealth is also more equalitarian because the system does not discriminate between investors and the rate of return. What each investor gets out of the system is a matter of what he invests. The capital market is the segment of the financial market where medium to long term financial instrument are created and/or traded to meet the long term funding needs of economic activities. The degree of effectiveness and efficiency of the market will determine the extent to which it will contribute to the process of economic growth and development. Adedipe (2004) The capital market can also be defined as the aggregation of institutions and mechanisms through which long term funds are mobilized and used for development purposes (Obadan 1998) The capital market, given the long term horizon and liquidity offered by its secondary market, provides the best framework for the mobilization of resources – G. Onosode (1998) According to K.S. Adeyemi (1998), the capital market is the aspect of the financial system which mobilizes and channels long term funds for economic development. “The capital market provides another option for government and companies to raise long term funds for the execution of capital projects such as construction of bridges, schools, factories, and purchase of vehicles, facilities, and equipment. This compares with the money market, which represents the short- end of the financial system that provides facilities for claims and obligations whose maturity vary from one day to one year.” (Okereke- Onyuike 2000). Ndanusa, S.A (2004), defined capital market as the collection of financial institutions set up for the mobilization of medium or long term loans. It is a market for long term instrument which include; market of mortgages of loan that is the market for mobilization and utilization of long- term loans. It is a market for long term funds for development. Osondu(1993) within the capital market are the primary and secondary market which includes issuing houses and the securities authorities for issuing of corporate bonds, shares and market of mortgage, this concern and its activities regulations rest in the hand of the stock exchange. Hence, capital market could be referred to as the mechanism whereby economic units desire to invest their surplus funds, interact directly through financial intermediaries with those who wish to procure funds for their business through the issuance or sale of shares stocks, bonds e.t.c Uzoagu (2002) . In the Nigeria context, participants includes; the Nigerian stock exchange, discount houses, development banks, investment banks, stock broking firms, quoted companies, the government, individuals and the Nigeria Securities and Exchange Commission. However, the Nigerian stock Exchange operates and manages the activities of the capital market. The capital market embraces trading in both new issues (primary) and old issues of stocks (secondary). EFFECTIVE DEVELOPMENT OF THE CAPITAL MARKET IS NECESSARY FOR THE FOLLOWING REASONS. a. The mobilization of savings from surplus economic units for channeling into national economic growth; b. The broadening of the ownership base of assets and, this, the creation of a healthy private sector through the empowerment of asset ownership. c. The promotion of rapid capital formation and real investment culture as against short term portfolio investments. The economic theory ‘growth’ is essentially a long term concept. It ignores short-term fluctuation in actual national income and emphasizes the impact of investment on raising expected income. Investment in the long run creates more and better capital equipment. The addition to the economy’s stock of capital raises the potentials of national income. The long-term increases in the growth theory rather than the short term fluctuations are found in Keynesian theory of income determination. Keynes (1978) said, from the earliest time- there was a very great change in the standard of life of the average person. This slow rate of progress or lack of progress was due to two reasons, the remarkable absence of important technical improvement and the failure of capital accumulation. Baran (1978) observed that the principle obstacles to rapid economic growth in the backward countries are the way in which their potential economic surplus is utilized. From the above elucidation, it could be seen that the capital market is paramount for economic growth in any economy. 2.1.1 BRIEF HISTORY OF NIGERIAN STOCK MARKET The Nigerian capital market (NCM) first came into existence in 1960 though it was then the Lagos Stock Exchange. It began operations in 1961 with 19 securities listed for trading. It had an authorized share capital of 10,000 Naira of 500 shares at 20 Naira each. The exchange was incorporated under the company ordinance as an associated company limited by guarantee and formed to promote commerce in Nigeria. The Lagos Stock Exchange was given initial financial backing by the Central Bank of Nigeria (CBN). In December 1997, following the recommendation of the government financial system review committee of 1976 headed by Pius Okigbo, the Lagos Stock Exchange was renounced and reconstructed into the Nigerian Stock Exchange. The Nigerian Stock Exchange has trading floors (some of them are electronic) in different parts of the country, though the headquarters is in Lagos. The trading floors were established at different times and they include; - Lagos 1961 -Kaduna 1978 -Port-Harcourt 1980 -Kano 1989 -Onitsha 1990 (February) -Ibadan 1990 (August) -Abuja 1999 -Yola -Uyo 2002. 2007. The Nigerian Stock Exchange is the centre point of the Nigerian Capital Market, while the Securities and Exchange Commission is the apex regulatory body. The Nigerian stock market has been operating for a little more than three decades. At inception, a specific exchange floor was established for it on the 5th of June, 1961. Dealings on the stock exchange are made through the brokers and jobbers, who themselves must be approved members of the exchange. As at December 31, 1991, more than 1/3 of the traded companies had been fully privatized while most of the others, relatively younger, have government as an important shareholder. The Nigerian Stock Exchange provides a strong mechanism for mobilizing private and public savings and makes such funds available for productive purposes. The exchange also provides a means for trading securities and encourages larger scale enterprises to gain access to public listing. The Nigerian stock market operates the main exchange for relatively large enterprises the 2 nd tier securities market (SSM) when listing requirements are less stringent for small and medium scale enterprises. According to the review of market performance in 2007 by the Director General of Nigeria Stock Exchange, Professor Ndi Okereke-Onyuike, there were 309 securities listed on the exchange with a total market capitalization of 13.295 trillion naira. Many of these listed companies actually have multinational affiliations. 2.1.2 PROCESS IN THE STOCK EXCHANGE MARKET There are lots of processes involved in the stock exchange market, they are discussed below; Firstly, we have what is called prospectus, which is any notice, circular advertisement or any document that offers to the public for subscription or purchase of any shares or debenture of a company. It is also a legal document issued when raising finance for a public company through a share issue, the content of which are subject to strict regulation. There is also Equity, which is the residual right of ownership over the asset of a company. It is a right that can be enforced only when everyone else has been paid. Specifically, the ordinary shares of a company. Central Security Clearing System (CSCS) is a computerized system of trading stock at the stock exchange. It makes the market most efficient, very transparent, fair, and simple. Insider Dealing is an Illegal dealings in shares by person with knowledge obtained from his position in the company. We have the Bears; they are value or long term investors. The Bulls are speculative or short term profit takers. The Issuing houses are mainly stock broking firms. It describes the corporate finance activity of merchant banks and stockbrokers. Members of the exchange need expertise to act as issuing houses, while companies need to be dealing members of the Nigerian stock exchange to become stockbrokers. The Market Capitalization is a firm’s value, as determined by the market price of its issued and outstanding common stock. The automated Trading system is a system whereby the the Nigerian Stock Exchange operates with dealers’ trading through a network of computers connected to a server. The automated trading system (ATS) has facilities for remote trading and surveillance. The exchange is in the process of connecting with dealers to commence trading from their offices or any part of the world. The Primary Market is a market where entirely new shares are offered for the first time. The modes of offer include right issues, offer for subscription, offer for sale, private placements. The Secondary Market is a market where existing securities are traded after their issuance in primary markets. In this case, over the counter market and organization market are available to rapid liquidity to investors. Securities traded here include: preference shares, debenture stocks, federal government development stocks, state and local government bonds and equities. Only licensed stock brokers of the stock exchange are allowed to transact business i.e. buy and sell shares on behalf of their customers. We also have what is referred to as the Derivative market; this is the type of market that is still at infant stage. It does not trade in issued securities but on the basis of future title to the security. Right offer is, probably, the only derivative being actively traded on the floor of the exchange. However, global depository receipts have been issued. The constituencies of the Nigerian Stock Market can be classified broadly into four categories: i. Regulators: They include: - Securities and Exchange Commission (SEC) - The Nigerian Stock Exchange (NSE) - Federal Ministry of Finance - Central Bank of Nigeria (CBN) ii. Intermediaries: They include: - Registrars - Stock broking firms - Issuing Houses - Audit Firms iii. Fund Providers: They include: - Individuals - Unit trusts - Pension funds - Insurance companies iii. Fund users: They include: - Companies Government 2.1.3 HOW TO GET LISTED ON THE STOCK MARKET An issuing house or stockbroker is required to get listed on the Nigerian Stock market, either for the purpose of raising long term funds or otherwise. It is the duty of the issuing house or stockbroker to study the company’s performance over the years, in order to determine its financial needs and to provide it with financial advisory services. The issuing house or stockbroker, together with reporting accountants, trustees, solicitors, and auditors produce a marketing document known as the Prospectus. This is the document the public rely on for making investment decisions. Necessary approval is sought from the Securities and Exchange Commission and other bodies. The proceeds of the issue are handed over for executing the proposed business program on long term investment and the stock is listed on the daily official list of the exchange. Listed below are the benefits of being quoted on the stock exchange: - Easy access to funds - Boosts public confidence - More transparent share valuation - Mergers and acquisition is made easier - More transparent share valuation - Enhanced status and credit facilities - Continuity of operations The 2 main markets listed on the Nigerian Stock Exchange presently are: i. The Main Market or First Securities Market: this is only for companies that have a primary listing on a foreign recognized stock exchange. These companies must have complied fully with all foreign listing requirements. ii. The Second Tier Securities Market: it was established in 1985 to encourage local entrepreneurs. It is a market for small and medium scale industries that cannot comply fully with listing requirements expected of them. 2.1.4 REVIEW OF DEVELOPMENT IN THE NIGERIAN STOCK MARKET The Nigerian capital market has grown tremendously since the establishment of the NSE (formerly the LSE) in 1961. Market capitalization as at the end of 1995 was N2.0b, up from N1.4b in 1990. Another index of size is the number of quoted securities which, for Nigeria, rose from 9, comprising 3 equities and 6 government securities in 1961, to 153 in 1980 with 90 equities, 13 debentures and 50 government securities. By 1994, it had further risen to 276 including 29 government stock, 70 industrial bonds and 177 equities. The growth of the Nigerian market has been influenced by government patronage, legislations, and policies. In the 1960s and 1970s, government raised funds from the market usually by floating development stocks. Also, government enacted legislations such as the income tax management Act 1961 which required both the pension and provident funds to invest a substantial proportion of their funds in government stock. The implementation of the Nigerian Enterprises Promotion Decree significantly stimulated the growth of the Nigerian capital market by making equity available. In 1984, the Stock Exchange took the initiative of introducing the second tier securities market (SSM) which gave encouragement to small / medium scale industries to seek quotation by stipulating less stringent listing requirements for them. This widened the investor base as well as the supply of securities on the market. In 1997, the Nigerian Stock Exchange introduced the Central Settlement and Clearing System that was expected to reduce the clearing days to 5 after transactions. Prior to this, the delivery system was very cumbersome as it took weeks for an investor to receive evidence of title for securities purchased. The delay was caused by the system of registration, authentication and the slow postal system. On the 1st of March 2000, the clearing days were further reduced to T+ 3, and by June of the same year, the Central Settlement and Clearing System (CSCS) launched a phone- in system to enable investors to confirm their stocks at any time, from any location. Another thing that affected the integration of the capital market with the global financial system was the issue of transfer of dividends and capital by the foreign investors. This was handled by the Foreign Exchange (monitory and Miscellaneous Provision) Decree No. 17 of 1995 which guaranteed transfer of funds unconditionally through an authorized dealer in freely convertible currencies. In keeping with the trend in the global securities market, The Nigerian Stock Exchange commenced the process of Demutualisation in 2007(i.e. when a mutual company owned by its users/members is been converted into a company owned by shareholders. In effect, the users/members exchange their rights of use for shares in the demutualized company) with the setting up of a committee of Council to design a blueprint for its implementation. The imperatives for Demutualisation lay in the enhanced financing opportunities it opens to The Exchange and its promise of improved efficiency in the management of The Exchange as a business. The Trading Floor in Lagos was re-opened during this year, following a comprehensive overhaul of the floor that included the installation of state-ofheart workstations, a central UPS (uninterrupted power supply) and stabilizer, and a redesigning of the floor to accommodate more dealing members. President Umaru Musa Yar’Adua GCFR, commissioned the new world-class Trading Floor on Friday, November 9, 2007. The Exchange has in the wake of this development commenced an upgrade of the Horizon, trading software. The upgrade to the latest version of Horizon, which comes with improved functionalities that would impact positively on trading on The Exchange, especially with regard to derivatives and bond trading. There was also the commissionioning of the Uyo Branch of The Exchange on Saturday, May 26, 2007 and the Automated Trading Floor was inaugurated on Monday, November 19, 2007.This was aimed at giving more Nigerians access to the market and expands the business opportunity for stockbroker. The Exchange increased trading hours from two hours to three hours, in response to increased trading activity. This has impacted positively on trading volume and enhanced the pricing efficiency of the market. Work also continued in the effort to deepen the Nigerian capital market by creating new products. Some of the new products considered by The Exchange include: Mortgage-Backed Securities, Asset-Backed Securities, Exchange-Traded Funds, and Derivatives such as Futures and Options. Significant headway was made on the arrangement for the introduction of Real Estate Investment Trusts (REITs), with the incorporation of the rules for this new market segment in the Listing Requirements of The Exchange. In the same vein, the Exchange incorporated into its Listing Requirements rules for the operation of a ThirdTier Securities Market for small and medium indigenous companies. During this year, listed securities increased to 309, and market capitalization stood at #13.295 trillion. The liberalization of interest rate in the money market positively affected development in the stock market as the era of subsidized interest rate to commercial and industrial firms has come to an end. The market has also demonstrated its ability to provide financing – equity and debt – to private sector enterprises and debt financing for public sector projects of various types and to the three tiers of government. Till date, the Nigerian stock market has contented itself with addressing local and direct foreign investors in private sector enterprises. That the market has grown in size and diversity of instruments offered is beyond dispute. Its continuing growth is essential to development in an economy. 2.1.5 OPERATIONS OF THE NIGERIAN STOCK MARKET Stock market operation cannot be fully understood unless one understands the duality concept of the stock market: the price determinants and the workings of the price movers. Here, it is necessary to explain some important terminologies often used: the bulls and the bears. The Bulls: they are speculative investors of short-term profit takers The Bears: They are value or long term investors. SHORT TERM TRADE IN THE STOCK MARKET This is a speculative trade of buying stocks in anticipation of making gains within a short period of time. The speculators come into the market to take advantage of making quick money from the market and create conditions that bring about a bullish market thus attracting new investors. THE GAINS The gains of short term play in stock market operation are many. One of the most important is that they create conditions that bring about the “Bull market”, which actually brings new investors into being, thereby making the market more active, liquid and attractive. The prices of stock can go as high as it could, and this will result to a continuous rise in both share index and market capitalization. It also makes the vibrancy of the market the talk of the town. Reports of activities at the capital market have become frontline news in media houses, including radio and television channels. All these were possible by the inflow of short term players in the stock market. Smart investors are known to cart away their profit and take to their heels before the sun set. One wonders why people are willing to take the risk. It is because the odds are stocked in their favor. In reality, the worst possible outcome could be a 100 percent loss of the investment, but the gains are potentially enormous and tempting too THE SHORTFALLS The major pain of market timing is that it is full of many short lived peaks and valleys. Therefore, one needs to know when the price is low and when it will peak so as to take advantage of investing at a low price and sell when it peaks before the downward trend sets in again. But this is very difficult because there is the problem of always hoping to make money when the stock was bought, making it difficult because there is the problem of always hoping to make money when the stock was bought, making it difficult to accommodate some losses by deciding to sell at a particular time. Thus, the stock is held on the hope that the price will bounce back, which may not. Short-term play teaches hard lessons to beginners, some of who may not come back to the stock market. It brings bearishness to the market. Both the market capitalization and all share indexes could come lower than has ever risen. REMEDIES In our own opinion; the following measures should be considered as to avoid the shortfalls: 1 The market trend should be studied and in particular, fundamentals of the company such as turnover growth, profit before tax, earnings per share, dividend per share and other qualitative factors. 2 There is also the need to take your loss quickly by accepting and respecting market opinion. 3 Partial selling is also advisable. At least, a quantity of the stock to enable recovery from the initial cost of investment while leaving the profit with the market to play with. 2.1.6 i. STOCK MARKET LEGISLATIONS The Lagos Stock Exchange Act (1961): This is the legal backing that established the Nigerian Stock Exchange. The salient point of this act is that only licensed stock brokers and issuing houses are allowed to buy shares on behalf of Nigeria and foreign investors. ii. The Securities and Exchange Decree 1979 and 1988 (as amended): it established the Securities and Exchange Commission, the apex regulatory body of the stock market. It is a government agency that conducts surveillance in securities dealing, promotes market development, and protects investors. The decrees replaced the capital issues decree of 1973. iii. Privatization and Commercialization Decree No 25: this federal government decree is the key element of the Structural Adjustment Program, designed to re-orientate government enterprises for privatization and commercialization towards a new horizon of performance, improvement, viability, and overall efficiency. iv. The Indigenization Decree of 1972 and 1977: this decree sought to enlarge the shareholding capacity of Nigerian citizens in Nigerian companies. The decree has been amended as part of the new industrial policy for Nigeria. Its main objective is to usher in a new economic order for the country. The indigenization of the economy had a positive impact on the stock market. The number of listed companies on the exchange increased during the exercise and 78 companies complied with the provisions of the indigenization decree through the stock exchange by reorganizing their ownership structure. v. Foreign Exchange Miscellaneous Provision Decree 1995 vi. Nigerian Investment Promotion Commission Decree 1996 2.1.7 STOCK MARKET PERFORMANCE Stock Market Performance is the indicator of the stock market as a whole or of a specific stock. It gives signal to the investors about their future moves. The movement in the price of a stock and the indexes gives the idea of the near future trend of the stock, sector or the economy as a whole. As financial domain is the most important one of an economy, so the stock market performance works as an indicator of the overall health of the economy. Stock Market Indexes typically gives the overall performance of the market or of a specific sector. Indexes reflect the performance of the economy or a sector in entirety. Stock prices are an indicator of the performance of the stock. If the price of a particular stock is rising, then it is perceived that it has certain positive news or signals. But if it decreases then there must be some news regarding its performance, which is generating negative signals to the market. Hence, the stock price movement and index movements show the general economic trend of a country. Stock market performance is affected by a wide array of factors such as economic, political, international, and company- specific issues. When it comes to the overall index performance then the domestic economy’s National income, GNP (GROSS NATIONAL PRODUCT) growth, Monetary issues, Political stability, International relations, Balance of Payment situation, e.t.c. comes into consideration, but when it comes down to specific stocks, then the company specific information (profitability, sales, profit margin, growth, e.t.c.) play important role in the price determination of the stock. When the stock prices and index movements show positive trend (that is upward movement) then we call that the stock market performance are bullish. We call an investor to be bullish when his perceptions about the market and the economy are positive, i.e. he is expecting further rise in prices, and consequently is in the buying spree. Some of the factors which boost up the market are good present or projected economic growth of the economy, positive monetary outlook of the apex bank, decrease in fiscal deficit, good performance of a company in terms of profit, sales, e.t.c. But when the general perception of the investors is negative, then the stock market also declines showing a bearish trend. When a person is not confident enough to buy stocks because of his negative expectations from the economy and sell off stocks, then he is known as an investor with bearish perceptions. If the performance of an economy is good, then the stock market performance is also good and bull markets are inevitable. Performance of a stock might exceed that of the actual performance of the economy (or a company) because the expectations of the investors might cross the actual performance of the same. Thus Bull Run encounters correction of indexes or stocks from time-to-time, which is actually a healthy sign. If the economic performances are not up to mark, then the stock market is most likely to underperform and might see a downward trend. This downward movement of the market is known as Bearish Market. Bearish/Bullish market may sustain for weeks or months with temporary rally known as secondary trend (or short term). When Bullish/Bearish market runs continue from 5 to 20 years with occasional corrections, then it is known as secular trend (Long term). Hence, overall economic and stock specific performance influences performance of the market. Thus, stock market performance acts as the barometer of the Economy as a whole. Economic Effects of Stock Market Performance 1. Wealth Effect The first impact is that people with stock will see a loss of their wealth. If a market fall is significant, it can affect their financial outlook. If stockholders are losing money in the markets, they are generally more hesitant to spend money; this can contribute to a fall in consumer spending. However, the effect should not be given too much importance. Often people who buy shares are prepared to lose money; their spending patterns are usually independent of share prices, especially for short-term losses. 2. Effect on Retirements Anybody with a private pension or investment trust will be affected by the stock market, at least indirectly. Retirement funds invest a significant part of their funds on the stock market. Therefore, if there is a serious fall in share prices, it reduces the value of retirement funds. This means that future retirement payouts will be lower. If share prices fall too much, retirement funds can struggle to meet their promises. The important thing is the long-term movements in the share prices. If share prices fall for a long time then it will affect retirement funds and future payouts. 3. Consumer Confidence Often stock price movements are reflections of what is happening in the economy. E.g. recent falls are based on fears of a US recession and global slowdown. However, the stock market itself can affect consumer confidence. Bad headlines of falling share prices discourage people from spending. On its own, bad news may have little consumer effect, but combined with falling house prices and stock prices, consumer confidence can be a strongly discouraging factor. Generally, the consumer confidence impacts of falling markets are what affect consumers and small businesses the most. This is known as a “psychological” response of the consumer. This response has a far greater chance of affecting you, the average consumer, business and markets than stock market performance itself. If a customer is afraid of spending, they will not. If fuel costs more, a greater amount of the consumer’s discretionary capital is affected and they will not spend on other items. In more challenging markets, consumers are far more reluctant to utilize credit. This is smart for consumers, but does little to extend their purchasing abilities to companies that have come to depend on consumer spending. Nigeria for instance is a part of a consumer-based economy. Most corporations rely on consumer spending at one point or another. If the consumer does not spend, big companies are impacted. To combat consumer unwillingness to spend, credit allowed consumers to leverage their incomes. For the first time, consumers are hyper-extended and unwilling to spend. In today’s scenario, the unwillingness of the consumer to spend or to use credit has affected companies dramatically. This is why consumer confidence, or sentiment, plays a significant role in how we perceive our economy. 4. Investment Falling share prices can hamper a firm’s ability to raise finance on the stock market. Firms that are expanding and wish to borrow often do so by issuing more shares - it provides a low cost way of borrowing more money. However, with falling share prices it becomes much more difficult. As said earlier, there is an often-repeated quote saying the stock market has predicted 10 out of the last 3 recessions. The point is that falling stock markets do not necessarily predict the economic future. Share prices can fall without causing a downturn in the economy. For example, one thinks of the stock market crashes of October 1987; there was not an obvious economic factor causing this share price fall. The major economies remained relatively unaffected by this stock market crash. In fact, the UK had record growth in the late 1980s. This time the stock market fall is due to economic weaknesses so is a better guide to future economic performance. 2.1.8 IMPACT OF STOCK MARKET PERFORMANCE ON THE NIGERIAN ECONOMY. Without exaggerating the contributions or importance of the capital market, it is clear that the degree to which government succeeds in achieving its objectives depends in part, on the current use of the capital market, the responsiveness of market players and participants to policy initiatives, regulatory regime and moral suasion, etc. It is also well known that the capital market, under the umbrella of the Nigerian Stock Exchange, greatly facilitated the nation’s privatization process. The stock market has had a lot of impact on the economy in more ways than one and some impacts are discussed below; FREEDOM TO TRANSFER FUNDS Almost all economies with vibrant emerging capital markets have relaxed restriction on the transfer of funds and, in respect of foreign investment, on direct and portfolio investment. In other words, foreign investors are allowed to bring in as well as repatriate capital and income without undue restrictions. This promote the growth, hence development of the economy. AVAILABILITY OF INFRASTRUCTURE The modern capital market thrives on the availability of accurate and reliable data and information that are disseminated to all interested parties. This therefore ensures efficient telecommunications, equipment to link buyers and sellers, and the availability of computers for processing transactions rapidly. PRIVATIZATION OF THE MAJORS The prospect of privatizing the Nigerian Telecommunication Limited (NITEL), the National Electric Power Authority (NEPA), the four petroleum refineries, the steel rolling mills, e.t.c estimated at hundreds of billions of naira has introduced fundamental changes in the stock market outlook with Nigerian companies quoted in foreign exchange markets. These parastatals now work efficiently, thereby, reducing the retardation of Nigeria’s economy. Success in privatizing these critical enterprises in the ‘commanding heights’ has changed the infrastructural landscape of the economy and enhanced prospects for many new economic activities. It has also reduced the operating cost of most enterprises, thus providing small and medium scale enterprises as real chance for survival and growth. Only an established capital market allowed us consider privatization on the scale we did, without risking being eluded by the full benefits of it. According to Claessens (1995), the existence of the Nigerian Stock Exchange entails number of benefits for the Nigerian economy. The benefits are in line with the general role of stock market in the development process. First, the stock market has been a source of capital for the corporate sector. With current market capitalization of about US $105.56 million, the market represents a viable mechanism for resource allocation. The mere presence of a stock market in the country boosts the international investment climate as it raises the chances of additional local financing for both foreign and loan direct investment. The stock market plays a morale boasting role to investors especially because the banking sector is battling with credibility problem following the distress of the financial sector. Secondly, the stock market has provided opportunity investment diversification. A large part of wealth currently invested in Nigeria would have been diverted to foreign countries but for the presence of the stock market. It, therefore, remains a viable institution for holding back capital flight thereby reducing underdevelopment of the economy. Thirdly, the stock exchange enabled mass participation in the privatization exercise as it did during the implementation of the indigenization program, thereby ensuring that a large number of Nigerians benefited from the ownership of the divested assets. The sale of public wealth through privatization would have benefited a few rich persons, thereby worsening income inequality if a stock market was absent. 2.1.9 IMPORTANCE OF STOCK MARKET TO AN ECONOMY The importance of the stock market in any economy cannot be overemphasized as it plays a major role in a nation’s economic growth and development. It importance hinges greatly on the functions it performs and some are listed below: The capital market, being a market through which medium and long term funds are mobilized and made available to private investors and government, provides a medium for matching economic units with surplus savings with those who have deficit savings but desire invisible funds. A well-functioning stock market will ensure that resources are allocated efficiently amongst competing investment projects and serve as a leading indicator of efficient economic activities in the economy. The stock market facilitates transfer of enterprises from the public sector to the private sector by increasing the marketability of new shares It provides an additional channel for engaging and mobilizing savings for productive investment and represents an alternative to bank deposits, real estate investments, and the financing of consumption loans. The stock market broadens the ownership base of assets and then the creation of a healthy private sector through the empowerment of asset ownership. The stock market provides a built in operational and allocation efficiency within the financial system to ensure that resources are optimally utilized at minimum transaction costs. It provided access to finance for new and smaller companies and encourages institutional development in facilitating the setting up of Nigeria’s domestic funds. It also provides depositors with better protection against inflation and currency depreciation, as well as providing alternative sources of finance other than taxation to fund public projects. Stock market provides sufficient liquidity for any investor or group of investors. The stock market promotes rapid capital formation and real investment culture as against hot, short term portfolio adjustments. As the importance of the stock market has been declared through the functions stated above, we would also like to emphasize its importance by discussing two major but pivotal roles that the stock market plays: It signals the state of health of the national economy. Here, trends in the market indicate whether the economy is headed in the right direction or not. It provides a measure of the residence of the national economy by the extent to which economic activities tell on it. In the second role, the market serves as an active and effective balance against the more regulated money market. Price determination is left entirely to the inter-play of the market forces of demand and supply of stocks which means the stock market is freer and provides a more dependable barometer of economic health. The most relevant importance of the stock market lies in its long-term perspective. Every investor buys a stock with full knowledge that profit would be realized in future from that transaction. Another attribute is that organizations that raise capital through it do not have to worry about maturity date and for those that raise funds through debt instruments, the burden of repayment is over a long period that allows the borrower to make adequate provision for eventual repayment. Moreover, the process encourages financial discipline, through the sinking fund agreement that a bond is structured to require. The summary of the above functions and roles which explains the importance of the stock market helps to stimulate industrial as well as economic growth and development in the Nigerian economy. 2.2 EMPIRICAL LITERATURE The stock market performance is one of the most controversial and wellstudied propositions in the literature of capital market. Even if there have been a number of researches and journal articles, economists have not yet reached a consensus whether the stock market performance has an impact on the growth of the economy, ongoing debate exists as to whether stock markets are like casinos, where more and more players are coming to place their bets or they are actually linked to economic growth. Robert Barro (1990) reported that in the case of U.S., stock market variables and stock returns, can largely explain the subsequent aggregate investments, he proved this by regressing the average growth rate in per capita output on the market capitalization and he discovered that the stock market accounts for a larger part of the aggregate investment in U.S. Harris(1997) analyzed data for forty-nine countries over the period from 1980-91 for the growth in GDP per unit of effective labor, investment as a percent of GDP, the growth of total employed labor and the total value of shares traded on the stock market as a percent of GDP. The study reported that the level of stock market activity has little explanatory power in the sample of developing countries and weak explanatory power for the sample of developed countries. In the work of Seyyed Oskooe (2006), he studied the effect of the stock market performance on the growth of Iran economy, using the quarterly real GDP and the Iran stock market index as his variables, covering the period from 1997:3-2006:3.He conducted causality test within the vector error correction model framework, he also used Johansen co-integration analysis to investigate whether the variables are co-integrated of the same order taking into account the maximum eigenvalues and trace statistics test. He applied the granger causality test in order to find the direction of causality between the examined variables of the estimated model. He concluded, by stating that the level of real economic activity is the main factor in the movement of stock prices in the long run and stock market plays a role as a leading economic indicator of future economic growth in Iran, in the short run. According to the study of Levine and Zervos (1996), they applied regression analysis to the data compiled from 41 countries for the years 1976 through 1993 to see the relationships between financial deepening and economic growth. One of the financial deepening indicators used in the analysis was the level of development of stock exchange measured by a composite index, liquidity and diversification indicators. Economic growth indicator selected, on the other hand, was the real growth rate in per capita GDP. Levine and Zervos reported a very strong positive correlation between stock market development and economic growth. The most interesting aspect of this study was the decrease in the statistical significance of other financial deepening variables after stock market development index was included in regression equation. The study concluded with the proof that stock market development is more influential than other financial deepening indicators on the growth of the economy. In the work of Mohtadi and Agarwal, they examined the relationship between stock market development and economic growth for 21 emerging markets, Nigeria inclusive, over 21 years from 1977 to 1997, using a dynamic panel method, and they used Market capitalization ratio, total value of shares traded ratio, turnover ratio, GDP, Foreign direct investment, Investment, Secondary school enrollment as their variables. The model was estimated in several different ways such as OLS, fixed effects, random effects, one way, and two –way models. Following the tradition, Hausman test was used to test for the appropriateness of the fixed versus random effect and F test was used to choose between the one-way or two –way models. Their result suggested a positive relationship between several indicators of the stock market performance and economic growth both directly, as well as indirectly by boosting private investment behavior. Thus they lend support both to financial intermediation literature as well as to traditional growth literature. Rajan and Zingales (1998) predicted the average annual real growth of value added in an industry in the United Stated over the period from 1980-90. As predictor variables, the study used the proportion of investments funded with external financing and the ratio of capital spending to net property, plant, and equipment. Industries were further divided into young and old companies. This process helped them to differentiate industries that were more or less dependent on external financing. The study wanted to test if financially dependent industries perform better in countries that have more developed financial sectors, as measures of financial development in each of forty-one countries. The study used the ratio of domestic credit plus stock market capitalization to GDP, the ratio of domestic credit to the private sector relative to GDP, and an index of accounting transparency. The study revealed that the financial development facilitates economic development by providing cheaper funds to growing industries. Levine and Zervos (1998) analyzed by using stock market liquidity (turnover of shares and value), size (market capitalization), volatility (twelve month rolling standard deviation), integration with world markets (CAPM and APT intercept terms), and bank credit for the private (bank credit to the private sector to GDP) as predictors of economic growth, capital accumulation, improvement in productivity, and savings growth rates for forty-seven countries from 1976-93. The study reveals a positive relationship between stock market and bank development and economic growth, capital accumulation, and productivity growth. The authors conclude that stock markets provide an easy means to trade the ownership of productive assets, which facilitates resource allocation, which, in turn, facilitates capital formation, which leads to faster economic growth. The study of Arestis, Demetriades and Luintel, 2001 found that in countries like Germany, stock market volatility has a significant and negative impact on growth. The study used a vector autoregressive model to study the relationship between stock market development measures and economic growth for developed economies, controlling for the banking sector development. The study finds that the stock market and economic growth both may be able to promote growth, with the impact of the banking system being stronger. With well-functional financial sector or banking sector, stock markets can give a big boost to economic development (Rousseau and Wachtel, 2000; Beck and Levine, 2003). Bell and Rousseau (2001) evaluated the relationship between individual macroeconomic indicators and measures of financial development in India and revealed that the financial sector has been instrumental in promoting economic performance. Nourzad (2002) analyzed the effect of financial development on productive efficiency using eight measures of financial development for countries at different stages of economic development. The study analyzed three sets of panels of data: annual data for twenty-nine countries from 1966-90, annual data for eighteen countries from 1970-90 and five year average data for twenty-eight countries from 1970-90. The author finds that productive efficiency is greater in countries that have more developed financial sectors i.e. the stock market. According to the study carried out by Jiyoti Koirola (2007) on the relationship between stock market development and economic growth in Nepal. He selected Gross Domestic Product (GDP), Government Investment, Government Expenditure, Foreign Aid, Foreign Direct Investment, Market Capitalization Ratio , Concentration Ratio and Liquidity as his variables. He used the augmented dickey fuller (ADF), co integration test, and granger causality model, to test for the reliability of the parameters. And he concluded that, there exist a strong relationship between the stock market and the economic growth. Mafizur and Salahudin (2007), study on the impact of stock performance on the economic growth of Pakistan suggested a positive relationship between efficient stock market and economic growth. They used a data for period from 1971 to 2006; they applied the autoregressive distributive lag model, using GNP per capita, Market Capitalization, Financial Instability which was measured by the standard deviation of the Inflation rates, Inflation rates, Foreign Direct Investment and literacy rate which was measured by the ratio of the number of people completing primary education to total population, as their variables. Hamao et al. (1990), Koch and Koch (1991), Roll (1992), Longin and Solnik (1995), used more sophisticated econometric techniques to measure crosscountry correlations, and found evidence of significant linkages between stock markets around the world. Some other studies focused on the evolution of linkages of emerging capital markets. Studies such as Harvey (1995), but particularly Bekaert and Harvey (1995), examined one period returns and the conditional means and variances of one period returns by examining a one factor asset pricing model. The study concluded that the expected returns in a country are affected by their covariance with country’ returns. The study further concluded that if the market was perfectly integrated then only covariance counted, while if the market was completely segmented then the variance was the relevant measure of market risk. Bekaert and Harvey (1995) used a conditional regime-switching model to account for periods when national markets were segmented from world capital markets and when they became integrated later in the sample. By applying sophisticated techniques they found evidence of significant linkages between the stock markets around the world. CHAPTER THREEE 3.1 METHOD OF EVALUATION The aim of the data evaluation was to evaluate the statistical reliability of the estimated parameters. The criteria for decision making will be based on examining the statistical criteria (first order test), and econometric criteria (second order test). 3.1.1 EVALUATION BASED ON STATISTICAL CRITERIA (First Order Test). (i) The Co-efficient of Determination (R2): It is a measure of the goodness of fit of a model. It simply tells us the total variation in the independent variable that is attributed to changes in the explanatory variable. Put differently, R2 shows the percentage of total variation of the dependent variable that can be explained by the independent variable. R2 = B1 + B2 +B3 ----------bn 2 (ii) The F-statistics: This is used to test the overall significance of a model. It involves the ratio of 2 independent estimates of variance. The regression equation is adequate if the f-statistic gives a value higher than the appropriate table f-statistic, but if the calculated f-statistic is less than the appropriate table figure ( at the chosen level of significance) found from the f-table with k1 and N-K degree of freedom, then the regression will be significant. (iii) The Student T-test: It is used to determine the statistical significance of parameter estimates. The t-statistics will be given in parenthesis beneath its parameter estimates. A two-tailed test would be carried out at the 1%, 5% and 10% levels of significance. When the calculated t-value is less than the table tvalue, the parameter is not statistically significant and vice-versa. 3.1.2 EVALUATION BASED ON ECONOMETRIC CRITERIA (Second Order Test) (i) The Dubbin, Watson (D.W) Statistic: The D.W. test is used to test for the presence of autocorrelation in the variables. The simple correlation matrix of the variables would be used as a guide in determining what combinations of the explanatory variables are responsible for multi-co linearity. It is a simple guide used to specify the right combination of the explanatory variables. 2 DW = } (et)2 Where et = present period errors et-1 = previous period errors Test for Hetroscedasticity We shall employ the White’s hetroscedasticity test see Gujarati (2004) third Edition. Hypothesis Ho: (There is no hetroscedasticity, i.e. homoscedasticity) Against H1 (There is hetroscedasticity) Decision Rule Reject Ho if the calculated hetroscedasticity value which follows the Chi Square distribution with 8 degree of freedom, otherwise accept Ho. (ii) Jacque-Bera Residual Normality Test The test is conducted to assert if the error term follows a normal distribution. It follows a chi-square (2) test with two degrees of freedom (2df). The hypothesis is stated as: H0: i = 0; normally distributed H1: I ≠ 0; not normally distributed 2 Decision Rule: Reject H0 if cal 2 ( 0.05) tab at 2 degree of freedom, and accept H0 if otherwise. Test statistics: s 2 (k 3) 2 JB n 24 6 Where n = sample size, S = Skewness coefficient, and K = Kurtosis coefficient For a normally distributed residual, the value of S and k are 0 and 3. Since the JB computed is expected to be zero with 2 degrees of freedom, if the value is close to zero/the P-value reasonably high, the residuals are normally distributed. (iii) Test for Multicollinearity. Multicollinearity test shall be used to ascertain the violation of the tenth assumption of classical linear regression model. In carrying out the test, we shall investigate the R2 and t-test. A classical symptom of multicollinearity is that a model with R2 which is high, say in excess of 0.8, and most of the t– value are not statistically significant, we say that the model has multicollinearity problem. 3.2 MODEL SPECIFICATION The main aim of the study is to examine the impact of the stock market in the growth process of the Nigerian economy. This study therefore specifies its model as; GDP= f (MK, Inv, ExR, I,) Where GDP: Gross Domestic Product MK: Market capitalization Inv: Investment ExR: Exchange rate I: Interest rate On the basis of a priori specification, ∂GDP / ∂MK >0 This says that there is a direct or positive relationship between GDP and market capitalization. A growth in market capitalization is indicative of greater financial interest of the populace in the real sector, which will serve to boost GDP. ∂GDP / ∂Inv >0 Gross domestic product is a direct function of investment, both private and public. Investments either result in greater output, or they facilitate lower cost and therefore greater efficiency. ∂GDP / ∂ExR >0 The above specifies a positive relationship between GDP and exchange rate. The greater the price of other currencies relative to naira, the more favorable Nigerian goods will be in the international market and this will boost national income. ∂GDP / ∂I <0 There exists an inverse relationship between gross domestic product and interest rate. This is because a rise in interest rate will discourage firms and individuals from taking loans and this would affect investment negatively, therefore militating against production/productivity. Specifying it in an explicit form, we have GDP= α0+ α1MK+ α2Inv + α3ExR+ α4Int+Ut Where, α1>0, α2>0, α3>0, α4<0, and Ut = error term. 3.3 DATA REQUIRED AND SOURCES Data used in this research project are secondary data. The data used were gotten form authentic sources, some of which are listed below: -Nigerian Stock Exchange fact book; -Nigerian Stock Market annual; -Publications and journals from reputable - CBN Statistical Bulletin CHAPTER FOUR PRESENTATION AND ANALYSIS OF RESULT Introduction Most time series data tend to contain infinite variances that are not mean- reverting and lie on the unit circle. Equation estimated from such series result in spurious regression that makes little economic sense. Indeed the loading of the endogenous variable is minuscule when in fact a long -run relationship exists between it and the economic fundamentals driving it. Thus each of the variables would be examined for unit root and co integration. Consequently, the Augmented Dickey – Fuller (ADF), defines the equations for these tests. 4.1 ADF Test for Stationary Employing the Augmented Dickey-Fuller test, unit roots test was run on the variables up to their 2nd differences with the following result: Table 4.1: Unit Root Test (ADF-test) Variable Lag Critical Values First length 5% 1% Differencing differencing DDLGDP 2 -1.957 -2.67 - -5.2697** DDLGDP 1 -1.957 -2.67 - -4.3401** DDLGDP 0 -1.957 -2.67 - -6.2457** DDLMC 2 -1.957 -2.67 - -4.1460** DDLMC 1 -1.957 -2.67 - -4.4705** DDLMC 0 -1.957 -2.67 - -5.3519** DDLINR 2 -1.957 -2.67 - -4.3329** DDLINR 1 -1.956 -2.665 -3.0821** - DDLINR 0 -1.956 -2.665 -4.7463** - DLRINT 2 -1.956 -2.665 -3.9000** - DLRINT 1 -1.956 -2.665 -4.3171** - DLRINT 0 -1.956 -2.665 -4.9513** - DDLEXR 2 -1.957 -2.67 - -4.0322** DDLEXR 1 -1.957 -2.67 - -5.4646** DDLEXR 0 -1.956 -2.665 -3.4027** - NB** indicate significance at the 5% & 1% levels. Second From the above table, the two right hand side shows the order of integration of the variables. The dash sign shows no stationary at that level. This result revealed that some variables (explanatory variables) were of the same order with the dependent variable. That is, they were made stationary after second differencing. Thus we can say they are integrated of order I ~ (2). Therefore, the evidence of co-integration was shown from the order of integration presented above, which proves that the dependent variable has the same order with some explanatory variables, and for this reasons, we conduct co-integration test as shown below. 4.2 Co integration Test Given the unit root properties of the variables, we proceeded to implement the Engle-Granger co-integration procedure. Since gross domestic product (dependent variable) have the same order of integration with some of the explanatory variables, we estimate their linear combination at level form without the intercept and obtain their residual which is then subjected to co integration test as show in Table 4.2. Table: 4.2 co integration result t-adf 5% value crit 1% crit value Residual -1.9587 -1.955 -2.66 Residual -1.7520 -1.955 -2.66 Residual -1.6282 -1.955 -2.66 The result presented in table 4.2 shows that there is no presence of co integration among the variables because the residual obtained from the linear combination of the non-stationary variables in question were not stationary at both 5% and 1% critical value. However, this led us to dropping the Error Correction Model (ECM) and make used of the formal model. 4.3 Presentation of the model result The summary of the model’s result is presented in this section. Table 4.3 Result Summary Modeling GDP Variable Coefficient s t- s Std. Error Statistic Prob. 12.804 0.11594 110.434 0.0000 0.12657 0.011921 10.618 0.0000 0.00061 0.000648 0.942 0.3567 0.096375 0.012493 7.714 0.0000 0.076674 0.017689 4.335 0.0003 Constan t MC RINT INR EXR R2 =0.982194, DW =1.95, F-Stat= 289.59 4.4 Interpretation of Result Market Capitalization (MC) Market Capitalization variations in the current year have a positive coefficient of 0.12657. This finding implies that the current value of variation in market capitalization indicator increases gross domestic product. That is a unit increase in market capitulation variation will lead to an increase in the gross domestic product by 0.12657 units. In other words as variation in market capitalization is increasing, gross domestic product is also increasing. Therefore, using the 2-t Rule of thumb, variation in market capitulation is statistically significant judging from the t-value of 10.618 which is greater than 2 in absolute value at 5% level of significance. This result suggests that the variation in market capitulation as a growth instrument appeared to have a meaningful impact on the growth of gross domestic product in Nigeria. Real Interest Rate (RINT) The variation in real interest rate possesses non-robust coefficients of 0.00061. This implies that a unit increase in real interest rate causes gross domestic product to increase by 0.00061 units, all things being equal. The minor responds of this result is further confirmed by its t-value of 0.942 which is less than 2 in absolute value at 5% level of significance following 2t Rule of Thumb. Though the finding here imply that positive variation exist between real interest rate and economic growth, it can be observes not to be in conformity with theories. As high interest rate reduces the incentive to borrow as well as investment which transmits to low growth in the economy. Investment Rate (INR) Variation in investment coefficient is positive; this positive value of 0.096375 displays by investment variation implies that a unit increase in investment variation causes gross domestic product to increase by 0.096375 units. In other words, investment variation is an effective macroeconomic instrument for maintaining growth in growth domestic product. This result is evidence in the t-value that is statistically significant at 7.714. Exchange Rate (EXR) The positive coefficient of exchange rate shows that it has a positive influence on gross domestic product. The result proves that a unit increase in exchange rate will lead to an increase in the gross domestic product by 0.076674 units. In other words, as variation in exchange rate is increasing, gross domestic product is also increasing. Again, using the 2-t rule of thumb, variation in exchange rate is statistically significant judging from the t-value of 4.335 which is greater than 2 in absolute value at 5% level of significance. This result suggests that the variation in exchange rate appears to have a meaningful impact on the growth of gross domestic product in the Nigerian economy. 4.5 Statistical Criteria (First – Order Test) These tests are determined by statistical theory and aims at evaluating the statistical reliability of the estimates and parameters of the model (Koutsoyiannis, 1977). From the sample observation, the first order test is carried out based on the following: R2, t – probability (t – prob) and F – test. Coefficient of Determination (R2) In our model, R2 = 0.982194, which implies that approximately 99% of the variation in the dependent variable (GDP) is explained by the variations in the explanatory variables. Judging by the size of the coefficient of determination (R2), 99% shows a good fit for the model. Meaning that 99% variations is explained in the model leaving around 1.28% variations in the model unexplained. Student t – Test In this section, we use t – statistics to test for the individual significant of the parameters. The significance of the result is shown below: Hypothesis Ho: the parameter is not statistically significant Hi: the parameter is statistically significant Decision Rule Reject Ho if t-cal t-tabulated Otherwise, Accept Ho α = 0.05% 1 – 0.05% = 95 level of confidence df = degree of freedom = (K – 1) Where K = no of parameter df = 5 – 1 = 4 T = tabulated = 2.132 Conclusion, The student- t test result above suggests that all the variables except real interest rate are statistical significance as indicated in the remark column below. Table 4.3: Significance Test Variables Constant Coefficients 12.804 T- T- Value Tabulated 110.434 2.132 RESULT Significant MC 0.12657 10.618 2.132 Significant RINT 0.00061 0.942 2.132 Not Significant INR 0.096375 7.714 2.132 Significant EXR 0.07664 4.335 2.132 Significant F – Test The F – test is conducted to ascertain if the model is statistically significant and to know if the data actually fit into the model to enable us ascertain the adequacy of the model for our analysis. Hypothesis Ho: b1 = b2 = b3 = bn = 0 (the model is not significant) H1; b1 b2 b3 bn 0(the model is significant) Where = 0.05 (At 5% level of significance. Decision Rule Reject Ho if F* > F0.05 Otherwise Accept Ho if F* < F0.05 F (4, 21) = 289.59 {0.0000} F. table = 2.84 Conclusion Since F* calculated is > F – tabulated we reject Ho and conclude that the model is statistically significant. 4.6 Evaluation based on Econometric Criteria (second order Test) These tests are based on econometric theory and are aimed at finding out whether the underlying assumptions of OLS regarding the estimation of time series data are satisfied. Test for Auto Correlation The Durbin Watson test shall be employed to test for the violation of the fourth assumption of Ordinary Least Square. Hypothesis Test Ho: P = 0 (the U’s are not auto correlation) Against H1: P 0 (the U’s are auto correlation) Decision Rule Reject Ho if d < (4 – du) negative auto correction or 4 d” < du (positive auto correction), otherwise accept Ho (i.e. d” lies between du and 4 – du … (du < d” < 4 – du). Note that du is the upper limit of Durbin Watson table for corresponding values of n and k. Conclusion Given that d” from the Durbin Watson is 1.95, du from the table is 1.80, we conclude thus: Since d” (1.95) > du (1.80) we accept Ho and conclude that there is no positive auto correction at 5% level of significance. Test for Hetroscedasticity We shall employ the White’s hetroscedasticity test see Gujarati (2004) third Edition. This test is basically focused on the variance of the error term. The test helps to ascertain whether the variance of the error term is constant. Hypothesis Ho: (There is no hetroscedasticity, i.e. homoscedasticity) Against H1 (There is hetroscedasticity) Decision Rule Reject H0 if X2˃X20.05 and accept if otherwise. From our result, the calculated Calculated chi square = 13.903 and tabulated chi square = 15.5. Therefore, since the calculated value of 13.903 is less that tabulated value of 15.5 we accept Ho of homoscedasticity or equal variance of the error terms. Test for Multicollinearity. Multicollinearity test shall be used to ascertain the violation of the tenth assumption of classical linear regression model. In carrying out the test, we shall investigate the R2 and t-test. A classical symptom of multicollinearity is that a model with R2 which is high, say in excess of 0.8, and most of the t– value are not statistically significant, we say that the model has multicollinearity problem. We conclude based on empirical findings as guided by the above decision rule, that the model is free from multicollinearity problem having all the variables except one statistically significance. Jacque-Bera Residual Normality Test The test is conducted to assert if the error term follows a normal distribution. It follows a chi-square (2) test with two degrees of freedom (2df). The hypothesis is stated as: H0: i = 0; normally distributed H1: I ≠ 0; not normally distributed 2 Decision Rule: Reject H0 if cal 2 ( 0.05) tab at 2 degree of freedom, and accept H0 if otherwise. Test statistics: s 2 (k 3) 2 JB n 24 6 Where n = sample size, S = Skewness coefficient, and K = Kurtosis coefficient For a normally distributed residual, the value of S and k are 0 and 3. Since the JB computed is expected to be zero with 2 degrees of freedom, if the value is close to zero/the P-value reasonably high, the residuals are normally distributed From the result obtained form Jarque-Bera (JB) Test of Normality, JB = 2 0.49601 which is shown in appendix, and from chi-square table tab = 2 2 ( 0.05) 5.99147. Therefore, since cal = 0.49601 < tab = 5.99147 at 5% level of significance, and for this reason, we accept H0 and conclude that the error terms followed a normal distribution. 4.7 Evaluation of Hypothesis Hypothesis 1 H0 the growth of stock market has no significant impact on the growth of Nigerian economy. Conclusion: Based on the various test conducted, we reject Ho and accept H1 and conclude that the growth of stock market has a significant impact on the growth of Nigerian economy. Hypothesis 2 H0 changes in investment links have no significant impact on the growth of Nigeria’s stock exchange. Conclusion: We reject Ho and accept H1 and conclude that changes in investment link have a significant impact on the growth of Nigeria’s stock exchange. CHAPTER FIVE SUMMARY, CONCLUSION AND POLICY RECOMMENDATION 5.1 Summary This study is an investigation of the impact of Nigeria stock exchange performance on the economic growth of Nigeria. To accomplish these objectives, an econometric methodology was adopted as a tool for testing the stated hypothesis. The ordinary least square was chosen as the estimation tool because of the advantages it has over other estimation technique considering the phenomenon under study. The result of the student - t test revealed that the coefficient for market capitalization, investment rate and real exchange rate are all statistical significant at 5 percent level of significance. But the coefficient of real interest rate were not statistically significant at 5 percent level of significance The R2 which is the coefficient of multiple determination also revealed that 99 percent of the variation in the dependent variable is caused by the variation in the explanatory variables. The F test result suggested that the model is statistically significant. It was further revealed from the econometric second order test that the model is free from the problem of Hetroscedasticity, Auto correlation and Multicollinearity, and was equally, normally distributed. 5.2 Conclusion In conclusion, we state that stock market development has played a major role in any economic development of Nigeria. And that Nigeria has witnessed tremendous growth in the stock exchange market. Nevertheless, to draw a better conclusion to this study, the following according to USAID/Nigeria: Economic Growth Strategy reports revealed by David T. King, (2003) are the key strength and weakness of Nigerian Stock Exchange market. Strengths: It has shown substantial growth in new issues volume in recent years It is reasonably well-supervised by the SEC and has a well-organized management structure It has an automated trading system, T+3 clearing and settlement system, and central depository, and a good website Investor protection has been recently improved with the establishment of an Investment and Securities Tribunal with supreme judicial authority over the capital markets The exchange is seeking to develop new products, particularly those that would appeal to foreign investors, such as instruments for investing in the upstream oil sector. It is courting foreign investors, including a recent well-attended road show at the New York Stock Exchange. Though not universally strong, there is a core group of professionally capable brokers. Weaknesses: Transactions costs are extremely high – approximately three percent on both sides of the transaction (so that the issue cost is seven percent) – inhibiting new issues and the development of secondary market. A small number of stocks represent the great majority of market capitalization and trading. IPOs are extremely rare – essentially the same set of companies has been trading for most of the past decade. This is due in part to the reluctance of companies to access the stock market, because of the requirement that they divulge their financials. However, the exchange is also criticized as being insufficiently inviting to new companies, with undue and expensive red tape requirements and slow responsiveness. Though trading system is automated, NSE has proven unprogressive in permitting remote trading capability, though this is said to be coming out soon. Presently brokers are forced to trade on the floor of the exchange. There are undesirable routine practices in exchange operations – rentseeking in the issuance process, and insider and proprietary trading is fairly common. NSE supervision of brokers is overly paternalistic, sometimes dictatorial. 5.3 Policy Recommendation Empirical research has proved that stock market development is crucial for sustainable economic development. This finding has also been substantiated by empirical result on stock market development and economic growth in Nigeria. Based on this fact, we make the following policy suggestions: The full liberalization of the financial sector is a crucial condition for efficient functioning of any financial system. The total liberalization of the financial sector is needed if the country’s dream of becoming one of the first twenty economies of the world is to be achieved. The activities of the Nigeria stock exchange should be made more transparent as this will bring about confidence in the mind of investors and people will be encourage to investment. The Nigeria security and exchange commission has a crucial role to play in ensuring that only firms with good financial standing are allowed to appear in the stock market. The government should encourage Nigerians to take advantage of the stock market and save for investment growth and capital formation in Nigeria. Finally, the current efforts at eradicating corruption completely in Nigeria should be encouraged for this also influences capital inflow into the country. 5.4 SUGGESTIONS FOR FURTHER STUDIES This study has looked at the impact of the Stock Market Performance on the growth of the Nigerian economy. It is not all encompassing in its scope and further research is required in the following areas: 1. There is a need for further research to examine and discuss the role of government in increasing the efficiency of the stock market. 2. It is also appropriate to examine the significance of other variables which may affect the market/ GDP other than the ones examined in this study. 3. The thickness and thinness of the stock market should also be examined and discussed as relatively thin markets causes inefficiency in price determination. BIBLIOGRAPHY Gujarati, N. (2006). Essentials of Econometrics. New York: McGraw Hill International Press. Koutsoyainnis A. (1977). Theory of Econometrics. London: Macmillan Education Ltd. Lorres D., & Kimpton, J. (1989). The Stock Market Theories & Evidence. Minions: Richard Irwin Inc. McKinnon, R.I. (1973). Money and Capital in Economic Development. Washington, DC : The Brookings Institution Nwankwo G.I (1980). The Nigerian Financial System. London: Longman Group. Osuala E.C. (1987). Introduction to Research Methodology. 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Post-Independence in India: A Case of Finance Lend Industrialization, Journal of Development Economics, Vol. 65, pp. 153-175. Bencivenga, V.R., & Smith B. (1991). Financial Intermediation and Endogenous Growth, Review of Economic Studies, Vol. 58, pp. 195209. Bencivenga, V.R., Smith, B., & Starr, R. M. (1996). Equity Markets, Transaction Costs, and Capital Accumulation: An Illustration, The World Bank Economic Review, Vol. 10, No. 2, pp. 241-265. Bernanke, B., & Gertler, M. (1989). Agency Costs, Net Worth, and Business Fluctuation, American Economic Review, Vol. 79, pp. 14-31. Bhide, Amar (August 1993). The Hidden Costs of Stock Market Liquidity, Journal of Financial Economics, Vol. 34, No. 2, pp. 31-51. Blanchard, O., Rhee, C., & Summers, L. (1993). The Stock Market, Profit, and Investment, Quarterly Journal of Economics, Vol. 108, pp. 115136. Demirguc, K., & Levine, R. (1996). 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APPENDIX year 1980 GDP 31546.8 MC INR 4.8 3620.1 RINT EXR -2.4 0.5464 -13.15 0.61 3757.9 1981 205222.1 5 1982 199685.3 5 5382.8 2.55 0.6729 1983 185598.1 5.7 5949.5 -13.2 0.7241 1984 183563 5.5 6418.3 -27.1 0.7649 1985 201036.3 6.6 6804 3.75 0.8838 1986 205971.4 6.8 5313.6 5.1 2.0206 1987 204806.5 8.2 9993.6 7.3 4.0179 1988 219875.6 10 11339.2 -21.8 4.5367 1989 236729.6 12.8 10899.6 -14.1 7.3916 1990 267550 16.3 10436.1 18 8.0378 1991 265379.1 23.1 12243.5 7.01 9.9095 1992 271365.5 31.2 20512.7 1993 274833.3 47.5 1994 275450.6 66.3 70714.6 1995 281407.4 180.4 119392 -52.62 21.8861 1996 293745.4 285.8 122601 -9.56 21.8861 1997 302022.5 281.9 128332 5.04 21.8861 1998 310890.1 262.6 152410 8.29 21.8861 1999 312183.5 300 154189 14.72 92.6934 2000 329178.7 472.3 157535 11.08 102.1052 2001 356994.3 662.5 162343 2002 433203.5 764.9 166032 11.95 120.9702 -14.7 17.2984 66787 -38.88 22.0511 -36 21.8861 -0.61 111.9433 2003 477533 1359.3 17450.3 6.71 129.3565 2004 527576 2112.5 23654.1 4.18 133.5004 2005 561931.4 2900.1 26846.6 0.05 132.147 2006 595821.6 8.69 128.6518 2007 634251.1 13294.6 36854.2 11.54 125.8331 5121 32546.8 ---- PcGive 8.00, copy for meuller ---- ---- session started at 6:41:52 on 28th May 2010 ---- Data loaded from: Femi.wks LGDP = log(GDP); LMC = log(MC); LINR = log(INR); LEXR = log(EXR); DLGDP = diff(LGDP, 1); DLMC = diff(LMC, 1); DLINR = diff(LINR, 1); DRINT = diff(RINT, 1); DLEXR = diff(LEXR, 1); Unit root tests 5 to 28 Critical values: 5%=-1.956 1%=-2.665 t-adf å lag t-lag t-prob DLGDP -1.4181 0.053125 2 -0.72506 0.4764 DLGDP -1.6204 0.052550 1 -0.67704 0.5054 DLGDP -2.1160* 0.051927 0 DLMC -0.10182 0.27200 2 -1.2951 0.2093 DLMC -0.56581 0.27616 1 -0.51082 0.6146 DLMC -0.87632 0.27168 0 DLINR -2.5352* 0.60479 2 0.028357 0.9776 DLINR -3.0821** 0.59089 1 -0.33883 0.7380 DLINR -4.7463** 0.57941 0 DRINT -3.9000** 17.390 2 1.0421 0.3092 DRINT -4.3171** 17.424 1 1.1886 0.2473 DRINT -4.9513** 17.580 0 DLEXR -1.7467 0.40032 2 -0.76134 0.4549 DLEXR -2.3501* 0.39648 1 -0.68705 0.4992 DLEXR -3.4027** 0.39190 0 DDLGDP = diff(DLGDP, 1); DDLMC = diff(DLMC, 1); DDLINR = diff(DLINR, 1); DDLEXR = diff(DLEXR, 1); Unit root tests 6 to 28 Critical values: 5%=-1.957 1%=-2.67 t-adf å lag t-lag t-prob DDLGDP -5.2697** 0.048965 2 2.5627 0.0186 DDLGDP -4.3401** 0.055075 1 0.77383 0.4477 DDLGDP -6.2457** 0.054571 0 DDLMC -4.1460** 0.26425 2 1.3970 0.1777 DDLMC -4.4705** 0.27017 1 1.4267 0.1684 DDLMC -5.3519** 0.27646 0 DDLINR -4.3329** 0.68845 2 1.0687 0.2980 DDLINR -5.4419** 0.69077 1 1.4122 0.1725 DDLINR -8.4753** 0.70621 0 DDLEXR -4.0322** 0.43318 2 0.73075 0.4734 DDLEXR -5.4646** 0.42834 1 1.6050 0.1234 DDLEXR -7.4353** 0.44342 0 EQ( 1) Modelling LGDP by OLS The present sample is: 1 to 28 Variable Coefficient Std.Error t-value t-prob PartRý LMC 0.41622 0.24605 1.692 0.1032 0.1027 LINR 1.2533 0.058696 21.352 0.0000 0.9480 LEXR -0.84034 0.30173 -2.785 0.0101 0.2368 Rý = 0.991266 å = 1.23966 DW = 0.471 * Rý does NOT allow for the mean * RSS = 38.41900938 for 3 variables and 28 observations Residual added to database Residual = Residual values of equation 1 Unit root tests 4 to 28 Critical values: 5%=-1.955 1%=-2.66 t-adf å lag t-lag t-prob Residual -1.9587* 0.74325 2 0.91431 0.3705 Residual -1.7520 0.74060 1 0.70928 0.4853 Residual -1.6282 0.73289 0 EQ( 7) Modelling LGDP by OLS The present sample is: 3 to 28 Variable Coefficient Std.Error t-value t-prob PartRý Constant LMC 12.804 0.11594 110.434 0.0000 0.9983 0.12657 0.011921 10.618 0.0000 0.8430 DRINT 0.00061101 0.00064835 0.942 0.3567 0.0406 LINR 0.096375 0.012493 7.714 0.0000 0.7392 LEXR 0.076674 0.017689 4.335 0.0003 0.4722 Rý = 0.982194 F(4, 21) = 289.59 [0.0000] å = 0.05394 DW = 1.95 RSS = 0.06109997625 for 5 variables and 26 observations Residual correlogram 26*(Sum of 4 squared autocorrelations) = 2.843 -1 0 1 lag ÚÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÂÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ ÄÄÄÄÄÄ¿ 1 ³.........................³.........................³ 0.007198 2 ³.....................****³.........................³ -0.19759 3 ³.........................³.........................³ 0.013161 4 ³.........................³*******..................³ 0.26473 ÀÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÁÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ ÄÄÄÄÄÄÙ Autoregression for Residual: 4 lags from 1 to 4 The present sample is: 7 to 28 Constant Lag 1 Lag 2 Coeff. 5.884e-005 0.02038 Lag 3 Lag 4 -0.1325 0.01324 0.2374 Std.Err 0.01199 0.2355 0.2382 0.2401 0.236 RSS = 0.0528023563 å = 0.0557317 Rý = 0.0870998 F(4, 17) = 0.405493 [0.8021] Testing for Error Autocorrelation from lags 1 to 2 Chiý(2) = 1.0031 [0.6056] and F-Form(2, 19) = 0.38121 [0.6881] Error Autocorrelation Coefficients: Lag 1 Lag 2 Coeff. 0.006114 -0.2021 Testing for ARCH from lags 1 to 1 Chiý(1) = 0.22071 [0.6385] and F-Form(1, 19) = 0.16924 [0.6854] ARCH Coefficients: Constant Lag 1 Coeff. 0.002128 0.09508 Std.Err 0.0009015 0.2311 RSS = 0.000234597 å = 0.00351386 Normality test for Residual The present sample is: 3 to 28 Sample Size Mean 26 0.000000 Std.Devn. 0.048477 Skewness 0.273699 Excess Kurtosis -0.351067 Minimum -0.078028 Maximum 0.117720 Normality Chiý(2)= 0.49601 [0.7804] Testing for Heteroscedastic errors Chiý(8) = 13.903 [0.0843] V01=LMC and F-Form(8, 12) = 1.724 [0.1904] V02=DRINT V03=LINR V04=LEXR Heteroscedasticity Coefficients: Constant V01 V02 V03 Coeff. 0.06886 -0.00418 3.537e-005 t-value 0.5113 V02ý -1.142 V03ý 0.7874 V04 V01ý -0.013 0.001164 0.0001817 -0.4992 0.5137 0.6542 V04ý Coeff. 9.556e-007 0.0006826 0.0004363 t-value 0.5265 0.5657 1.149 RSS = 0.000110155 å = 0.00302978 Test of Functional Form Chiý(14) = 17.538 [0.2287] V01=LMC and F-Form(14, 6) = 0.88818 [0.6033] V02=DRINT V03=LINR V04=LEXR Heteroscedasticity Coefficients: Constant V01 V02 V03 V04 V01ý Coeff. 0.2581 -0.01468 0.0005259 -0.05606 0.03448 0.000604 t-value 0.9308 -0.4696 V02ý V03ý 0.6224 -0.9425 0.8186 0.4613 V04ý V02 * V01 V03 * V01 V03 * V02 Coeff. 2.383e-007 0.003292 0.002025 9.955e-005 0.0003268-7.977e-005 t-value 0.09355 1.011 0.5596 0.9239 V04 * V01 V04 * V02 V04 * V03 Coeff. -0.0001306-1.276e-005 -0.003752 t-value -0.0331 -0.1712 -0.8172 RSS = 7.70605e-005 å = 0.00358377 RESET test for adding Yhat^2 RESET F( 1, 20) = 0.10276 [0.7519] 0.1127 -0.715