Volatility and Risk Return Implication of Global Financial Meltdown Essay

This study attempts to place in the Nigerian perspective for the period of 1989 and 2008, the role of the stock market in the supply of new funds to the economy. The volatility and risk return implication for the Nigerian Stock Exchange as international portfolio investors withdraw their funds in the face of the global financial meltdown was considered. With the help of the Minitab software and gathering some notable stock market development indicators such as market capitalization, NSE-All share index, New Issues, Consumer Price Index, Inflation rate. Dollar-Naira Exchange rates and GDP figures the relationship between stock market development and New Issues was found to be positive and significant. This finding contrasts with previous studies in this area The costs of raising new funds in the Nigerian Stock market was found to be 6.25% of total amount raised, which is above international best practice.. This study therefore suggests that for a significant increase in the supply of new issues that are necessary for growth in the real sector of the Nigerian economy to be achieved, the focus of policy should be on measures that promote growth and sustain development in the stock market.

1.0 Introduction

The stock market is an economic institution, which promotes efficiency in capital formation and allocation. The stock market enables governments and industry to raise long-term capital for financing new projects, expanding and modernizing industrial/commercial concerns. If capital resources are not provided to those economic areas, especially industries where demand is growing and which are capable of increasing production and productivity, the rate of expansion of the economy will suffer. A unique benefit of the stock market to corporate entities is the provision of long-term, non-debt financial capital. Through the issuance of equity securities, companies acquire perpetual capital for development. Through the provision of equity capital, the market also enables companies to avoid over-reliance on debt financing, thus improving corporate debt-to-equity ratio. The existing literature clearly shows that developed economies had explored the two channels through which resource mobilization affects economic growth and development – money and capital markets ( Demirguc-Kunt and Levine, 1998).

This is however, not the case in developing economies where emphasis was placed on money market with little consideration for capital market (Nyong, 1997). With the introduction of structural adjustment programme (SAP) in Nigeria, and the various banking and financial reforms that followed, the country’s stock market has grown very significantly (Soloudo, 2009; Alile, 1996). This is as a result of deregulation of the financial sector and the privatization exercises, which exposed investors and companies to the significance of the stock market. Equity financing became one of the cheapest and most flexible sources of finance from the capital market and has remained a critical element in the sustainable development of the economy (Soloudo, 2008; Okereke-Onyiuke, 2000). Though stock market is growing it is however characterized by complexities. The complexities arise from trends in globalization and increased variety of new instruments being traded: equity options, derivatives of various forms, index futures.

However, the central objective of the stock exchanges worldwide remains the maintenance of the market efficiency with attendant benefit of economic growth (Alile, 1997). According to Nyong (1997) the financial structure of a firm, that is, the mix of debt and equity financing, changes as economies develop. The tilt is however, more towards equity financing through the stock market.

The determination of the overall growth of an economy depends on how efficiently the stock market performs its functions in the allocation of scarce capital to the productive sectors. As the stock market mobilizes savings, concurrently it allocates a larger proportion of it to the firms with relatively high prospects as indicated by its rate of returns and level of risk. The importance of this function is that capital resources are channeled by the mechanism of the forces of demand and supply to those firms with relatively high and increasing productivity thus enhancing economic expansion and growth (Alile, 1997). The economic down turn that we have experienced in the last two years has affected the fortunes of listed securities in the Nigerian Stock Exchange bringing with it volatility on their risk –return profiles.

Statement of Problem:

Given the impact of volatility and returns on stock market as a result of global financial meltdown, the ability of the stock market to raise new capital in sufficient quantity to provide the needed capital for infrastructural development and also providing new capital for industries diversification of the economy becomes a major policy proposition for the managers of the economy. In the light of huge slides in the prices and returns of securities in the market, the wiliness of existing and potential investors to continue to invest in the market needs to be assured for the stock market to perform one of its basic function of mobilization and allocation of scarce resources.

Objective of the Study

In general terms, this paper is set out to examine the implications of the shocks that have been experienced in the stock market in Nigerian as a result of the global financial meltdown, and the capital market continued ability to function as a major engine of economic growth and development of the nation. The stock market impacts on the economy through: its intermediation process by providing financial resources, new capital, for the financing of long-term projects. Its allocative mechanism to ensure that the market attracts new funds and retain existing investors by providing competitive returns on investments Examining the stock price – return relationship in a financial system facing global economic meltdown.

Where the problem of this research is resolved on the positive side, the various reforms and interventions in forms of financial stimulus and bail out of the financial system by governments of developed and developing nations in order to stabilize the financial system architecture will become an important financial management policy. That is to say there should always be the need for any government to be bothered or support the stock market for its contribution to the supply of new funds for the development of the economy

Research Hypotheses

In order to address the issues above, the following prepositions shall be tested. 1.Ho: The stock market does not contribute to the supply of funds needed for economic growth of Nigeria.

H1: The stock market contributes significantly to the supply of funds needed for economic growth of Nigeria.

2.Ho: The stock market infrastructure does not have any bearing on the levels of new Issues in the capital market.

H1: The stock market infrastructure does have significantly bearing on the levels of new Issues in the capital market.

3. Ho: There is no significant relationship between the price and return volatility of stocks in the Nigeria stock market and the supply of fresh capital.

H1: There is a significant relationship between the price and return volatility of stocks in the Nigeria stock market and the supply of fresh capital.

Literature Review

2.1 Stock Market and Economic Growth: Channels of Linkage

Efforts were made by Nyong (1997) to develop an aggregate index of capital market development and use it to determine its relationship with long-run economic growth in Nigeria. The study employed a time series data from 1970 to 1994. For measures of capital market development the ratio of market capitalization to GDP (in percentage), the ratio of total value of transactions on the main stock exchange to GDP (in percentage), the value of equities transaction relative to GDP and listings were used. The four measures were combined into one overall composite index of capital market development using principal component analysis. A measure of financial market depth (which is the ratio of broad money to stock of money to GDP) was also included as control. The result of the study was that capital market development is negatively and significantly correlated with long-run growth in Nigeria. The result also showed that there exists bi-directional causality between capital market development and economic growth.

The return generating process of stocks traded in emerging markets has been investigated by a number of researchers also. These emerging markets have a lower investable market capitalization relative to gross domestic product as compared to developed markets (well above 25 per cent) and emerging markets (below 25 per cent). Emerging markets include frontier markets. These markets provide small, illiquid, less accessible and less known investment opportunities.

These markets can be considered as highly risky as investors are more likely to be exposed to exchange rate volatility, low levels of liquidity which inhibit easy buying and selling of stock, repossession of privatized assets, defaults on government obligations, revocation of concessions given by previous governments, financing difficulty, as well as frustration due to inadequate legal and regulatory frameworks. For instance, the 2007 African Stock Markets Handbook, published by the United Nations Development Programme (UNDP), shows that foreign investment can be quite high in frontier markets, reaching as high as 60 per cent of capitalization in Ghana and Botswana. These figures contrast with average foreign ownership for other emerging and developed markets of about 10 per cent of capitalization.

Claessens et al. 1998; Fama and French 1998; Patel 1998; Lyn and Zychowicz 2004; Ramcharran 2004; have investigated the relationship between stock returns and fundamental risk attributes, while others (Beakaert and Harvey 2002, 2003; Erb et al. 1996a, 1996b; Harvey et al. 2002) have investigated the relationship between country index returns and composite risks factors in emerging markets, and it is therefore only to be expected that either of these approaches should explain the risk-return relationship in frontier markets as well. The most outstanding empirical findings are from Girard and Omran (2007), it indicates that an approach consisting of only the fundamental factors or only the composite risk factors does not provide as good an understanding of the return generating process as an approach that considers fundamental factors and country specific factors. Another interesting finding of their research relates to the coefficient on size and price to book values.

They found that these variables have positive coefficients, indicating that in frontier markets, the small and value stocks are less risky investment avenues than the large and growth stocks. This is contrary to what is widely observed in the developed markets and in a number of emerging markets. Although the emphasis in this study is not to investigate the reasons behind the difference in the signs of these coefficients, several explanations are provided in other papers. For example, Harvey and Roper (1999) argue that many emerging markets experience an increase in the number of firms, instead of value due to mobilization of capital. Bolbol and Omran (2005) and Girard and Omran (2007) argue that a majority of the firms trading in these small and thinly traded markets have limited access to debt financing.

Claessens et al. (1998) find that factors such as market micro-structural issues and regulatory and tax regimes may cause size and price to book to have signs different from those commonly observed in developed markets. A related approach to price risk around the world has been suggested by Erb et al. (1995) who show that a country risk rating model can provide further explanations for the return generating process in world markets. The authors in these reviewed works explored composite risks such as political risk rating, economic risk rating, financial risk rating and country credit ratings. They find that the ICRG composite is highly correlated with S&P’s sovereign rating (more than any other rating measures). They conclude that ratings predict inflation and are correlated with wealth.

They also observe that a lower rating (higher risk) is associated with higher expected returns. In another article, Erb et al. (1996b) investigate how ICRG composite risk scores (political, financial and economic risks) explain the cross-sections of expected returns on IFC country indexes. They find that economic and financial risks include the most information about expected returns in developed markets, while political risk has some marginal explanatory power in emerging equity markets. Lyn and Zychowicz (2004), Ramcharran (2004) and Girard and Omran (2007) describe mixed results for the relationship between fundamental attributes and returns in emerging markets. In some cases, the authors find positive relationships between size and returns as well as a positive relationship between price to book value and returns, which is contrary to the conventional belief that small and value firms are riskier. Several arguments may account for these findings.

Daniel and Titman (1997) argue that firms’ characteristics explain the return premium, i.e., a value premium will exist in emerging markets if value stocks are less liquid than growth stocks. Harvey and Roper’s (1999) argument is that market growth has led to the mobilization of new capital and an increase in the number of firms rather than an increase in value. Further, due to either the restrictions to debt financing or the immature debt markets, small firms have a capital structure made up principally of equity, while larger firms with their international exposure can more easily access leverage. For instance, Bolbol and Omran (2005) and Girard and Omran (2007) indicate that only large firms have higher leverage ratios in Arab markets. Claessens et al. (1998) also suggest that market microstructure causes these substantial differences and that regulatory and tax regimes force investors to behave differently in nascent markets.

The authors also hypothesize that the positive relationships between returns and size and market-to-book value can be attributed to the segmentation of financial markets. The efficient market hypothesis (EMH) of Fama (1970) asserts that in an efficient market, prices always fully reflect all available information. EMH has three forms: weak, semi-strong and strong, depending on the different degrees of information content. When a market is weak-form efficient, its prices reflect all the information available in the past prices or returns.

The semi-strong form has the prices of financial assets instantly reflecting publicly available information. Lastly, in a strong-form efficient market, prices of financial assets even reflect inside information. Accordingly, in a weak-form efficient market, participants cannot exploit past prices or returns of a financial asset to consistently beat the market. Adeyemi (1998) identified a number of factors that account for lack of interest by Nigerian companies in being listed on the exchange: (i) high cost of public quotation, (ii) reluctance to dilute ownership and control through public quotation, (iii) the interest rate structure in the past which favoured debt financing over equity financing, and (iv) stringent requirements for listing.

Review of developments in Nigeria’s stock market

Establishment of the Nigerian stock market

The Nigerian stock market came into fruition with the establishment in 1960, of the Lagos Stock Exchange. It became the Nigerian Stock Exchange in 1977 with branches established in different parts of the country. As at the end of March 2009 the Nigerian Stock Exchange has 14 branches across Nigeria trading on line real time, other than its world class trading floor in Lagos. These are in: Kaduna, Port Harcourt, Abuja, Kano, Onitsha, Ibadan, Yola, Benin, Uyo, Ilorin, Abeokuta, Owerri and Bauchi. Lagos also serves as the head office of the Exchange. Each of the branches has an Electronic Trading Floor.

The stock exchange creates a market place where companies can raise capital, often referred to as primary market. At this market, shares are issued for the first time to the public; and shareholders can also trade in shares of already listed companies, that is, secondary market. At the secondary market, shareholders buy and sell existing shares. The Exchange is now served with a state-of-the-art Data Centre. The Centre is in consonance with the Exchange’s strategy to leverage on technology to drive its businesses and continually serve stakeholders’ needs. The facility built in accordance with industry best practice, accommodates all its IT and power requirement necessary to meet its growth objectives, especially with regard to the dissemination of market data (giving live feed to financial information vendors) and remote access to the Trading Engine.


Clearing, Settlement and Delivery of transactions on The Exchange are done electronically by the Central Securities Clearing System Limited (CSCS), a subsidiary of The Stock Exchange. The CSCS Limited (“the Clearing House”) was incorporated in 1992 as part of the effort to make the Nigerian stock

market more efficient and investor-friendly. Apart from clearing, settlement and delivery, the CSCS Limited offers custodian services. Transaction cycle is T + 3. NSE/CSCS Trade Alert

The Trade Alert was launched on 24th March 2005 to further secure the market against unprofessional conducts, especially unauthorized sale of clients’ shares, which are capable of eroding investor confidence. Also, the device functions as a medium for communicating market-related information (like corporate actions) to subscribers. Investor response (through subscription) has been satisfactory.

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Transactions in the Nigerian stock market are guided by the following legislations, among others: Companies & Allied Matters Act of 1990.

Investments & Securities Act of 1999 as amended in 2007

Nigerian Investment Promotion Council Act of 1995.

Trustees Investment Act of 1990.

Foreign Exchange (Monitoring & Miscellaneous Provisions) Act of 1995. and its various amendments

The Pension Act of 2004.


Transactions on The Exchange are regulated by The Nigerian Stock Exchange, as a self-regulatory organization (SRO), and the Securities & Exchange Commission (SEC), which administers the Investments & Securities Act of 2007 The Nigerian Stock Exchange, is an Affiliate Member of the World Federation of Exchanges (WFE).


In 1995, the Federal Government abrogated the Exchange Control Act of 1962 and the Nigerian Enterprise Promotion Decree of 1989. Consequently, foreigners now participate in the Nigerian capital market both as operators and investors. There are no limits to the percentage of foreign holding in any company registered in the country. 3.2 Nigerian Stock Market Measures

Stock Market size

A common index often used, as a measure of stock market size is the market capitalization. Market capitalization equals the total value of all listed shares. In terms of economic significance, the assumption is that market size and the ability to mobilize capital and diversify risk are positively correlated. For the two decades covered by the study (1989 -2008) the average market capitalization was N1876 billion with highest capitalization of N 13.295 trillion in 2007 and lowest capitalization of N12.00 billion in 1989. The trend is shown in Table 1.

(i) Liquidity

Liquidity is used to refer to the ability of investors to buy and sell securities easily. It is an important indicator of stock market development because it signifies how the market helped in improving the allocation of capital and thus enhancing the prospects of long-term economic growth. This is possible through the ability of the investors to quickly and cheaply alter their portfolio thereby reducing the riskiness of their investment and facilitating investments in projects that are more profitable though with a long gestation period. Two main indices are often used in the performance and rating of the stock market: total value traded ratio; and turnover ratio. Total value traded ratio measures the organized trading of equities as a share of the National output. For the period 1998-2008 it averaged 43,986.70 per annum with the highest of 331,811.22 in 2007 and lowest of 0.07 in 1990 and 1991. It is expected that it will positively reflect liquidity on an economy-wide basis.

Year by year break down is shown in column 6 of Table 1. Turnover ratio is used as an index of comparison for market liquidity rating and level of transaction costs. This ratio equals the total value of shares traded on the stock market divided by market capitalization. It is also a measure of the value of securities transactions relative to the size of the securities market. The Nigerian Stock Exchange had an annual average turnover ratio of 2.73 between 1989 and 1999. This low index is an indication of relative illiquidity and stunting of the overall growth of the market within this period. However the annual average turnover ratio improved substantially to 11,496.81 between 2000 and 2008. This reflects the frequent heavy deals that were transacted on the exchange within this time. Column 7 of Table 1 gives the trend for the study period.

(ii) Concentration

This factor measures the level of domination of the market by a few enterprises. The significance of concentration as a measure of performance of stock market is because of the adverse effect it may have on the liquidity of the market. The share of market capitalization accounted for by the 10 largest stocks often measures the degree of market concentration. In Nigeria, a few companies dominate the market as the market capitalization of the top ten equities listed on the Nigerian Stock Exchange accounted for about 40 percent of the total stock market capitalization in 1999 whereas 20 most capitalized companies account for about 50% of the total market capitalization of the exchange in 2008 (iii) Number of listed Companies:

The average number of listed companies in the Nigerian stock market for 1989-2008 periods was 183 companies. At the end of 2008, the number of listed securities stood at 301 including 213 companies. There were decreases in number of quoted companies in 2008 as against 315 in 2007. Essentially they were as a result of delisting of some non- performing and morbid companies that were previously listed. Column 4 of Table 2 gives the trend for the study period.

On the African scene, the Nigerian stock market performed relatively well. The stock market ranked 3rd in the number of listed companies with 301 after Egypt with 1032 companies and South Africa with 668 companies. In effect, the Nigerian stock market provides greater option to investors in terms of choice of equities than most African market do. Over the years, the Nigerian stock market witnessed growth of equity listings, especially in the 1990’s and mid 2000. This was attributable to economic policies put in place by the government, notable among which was privatization of public enterprises and consolidation,/recapitalization of financial institutions between 2004 and 2007.

(iv) New issues

An aggregate of N4.617 trillion was raised from the market between 1999 and 2008. In 1999, total new issues were N12.0 billion. By 2000, total new issues had risen to N17.2 billion and by 2003, N180.1 billion. It rose to N552.8 billion in 2005 and N1.935 trillion by 2007. The banking recapitalization exercise, aggressive public enlightenment and improved market infrastructure can be cited as the major reasons for the growth of new issues. However the impact of the global financial meltdown has been felt in the market as only N922.65 billion was raised in 2008 and no new issue had been raised within the first quarter of 2009.

Sources: Nigerian Stock Exchange Annual Reports and Accounts, Various years; Securities and Exchange Commission Annual Reports and Accounts; Central Bank of Nigeria Statistical Bulletin 1998 and the Federal Office of Statistics Statistical Bulletin Columns (4) –(7) are from the Researcher’s calculations

Also, there was the establishment of second-tier securities market (SSM) which allowed small/medium-sized enterprises to participate in the capital market. As at the end of 1999 16 firms were listed in SSM market. The market capitalization of the Exchange, which opened the year 2007 at N5,120.94 billion, closed the year at N13,295.00 billion.

This growth was attributed to new listings and recovery of equity prices. This represents a breakthrough in the Exchange controls of the stock market, at the same time enhancing opportunities for portfolio diversification by domestic investors. The world stock market performance review in 2006 showed that the Nigerian stock market was ranked 73 out of 97 countries based on percentage change in the price indices in US dollars; 78 out of 105 countries when ranked by turnover ratio; and 87 out of 100 based on average company size. Also, based on the market capitalization, value traded, and number of listed domestic companies in 2007; the Nigerian market failed to make the top 40 in the world (Standard and Poor’s Emerging Stock Markets Factbook, 2007).

In April 1999, the Nigerian Stock Exchange launched its Automated Trading System (ATS). This new computerized system was designed to make the market more efficient and transparent. This new computerized system complements the Central Clearing Depository System (CCDS) which was introduced in 1997.


Stock market development can be categorized using three main characteristics: Traditional, institutional and asset pricing (Demirgüç-Kunt and Levine 1996). Traditional characteristics are concerned with basic growth measures of stock market. These measures include number of listed companies and market capitalization. There are also the Institutional characteristics measures. These Institutional characteristics measures are the regulatory and legal role that may influence functioning of the market, information disclosure and transparency requirements as well as market barriers and trading costs. Lastly, the Asset Pricing characteristics measures focus on the efficiency of the market especially in relation to the pricing of risk. 3.1 Traditional Characteristics

a) Market Size

With 269 securities listed and a market capitalization of approximately N300 billion or US$3,000 million, relatively to international standards, the Nigerian Stock Exchange can still be regarded as small. In Africa, Nigeria ranked 4th after South Africa, Egypt and Morocco in term of market size (Standard and Poor’s Emerging Stock Markets Fact book, 2000). Among the emerging markets, Nigeria’s share of emerging market capitalization out of 54 markets covered by Standard and Poor’s was just 0.1% as at the end of 1999 (Standard and Poor’s Emerging Stock Markets Fact book, 2000). Alile and Anao, (1986) adduced possible reasons for the small size.

One of the reasons is that indigenous entrepreneurs were not too keen into going public due to fear of losing control. However, an innovative move by the stock market through the creation of second–tier securities market (SSM) tried to find solution to the problem. Measures taken by the governments and the exchange itself are expected to boost the resource base of the stock market in Nigeria. These measures are: Privatization of Public Enterprises, linking up of the exchange with Reuters Electronic Contributors System for on line global dissemination of stock information, launching of the exchange’s Intranets System (CAPNET) and the transition of the exchange from manual call-over Trading System to Automated System (ATS) in April 1999. It is also expected that the present democratic dispensation will impact positively on the turnover of the exchange.

3.2 Institutional Characteristics

a) Regulatory Institutions

Regulation is seen as a way of buoying investor’s confidence in brokers and other capital intermediaries and stakeholders. It ensures fair play and transparency in the market operations. This in turn encourages investment and trading in the stock market. Nigerian capital market had from the onset ensured that a strong institutional framework was in place through the establishment of Capital Issue Commission (though with no legal status), which later metamorphosed, to Nigeria Securities and Exchange Commission in 1979 and serves as the apex regulatory body of Nigerian capital market.

Of added importance is that the Nigerian Stock Exchange itself is a self-regulatory institution (Inanga and Emenuga, 1997). With the review of the regulatory framework of the capital market by Chief Dennis Odife panel in 1996, and the acceptance of its recommendation by government, which led to the enactment of the Investments and Securities Act (ISA) 1999. One of the unique and novel features of ISA 1999 was the establishment of the Investments and Securities Tribunal in June 2003. The Investments and Securities Tribunal is a specialized court vested with exclusive jurisdiction to settle all disputes and controversies arising from transactions in the capital market.

b) Transaction costs

One of the relative measures of the efficiency of a stock market is the level of transaction cost. The higher the transaction cost the highly inefficient the market is perceived to be. Transaction cost can either be viewed from the perspective of an investor or that of the companies. From a company’s point of view, it includes all expenses incurred in the bid to make public offer of equity or loan stock. For an investor on the other hand, transaction cost comprises all expenses incurred in the purchase of shares or loan stock. Identifiable transaction cost in Nigerian capital market includes: application fee (0.5%), valuation fee (0.75%), brokerage fee (1%) and vending fee (1%). Other cost items include payment to auditors, solicitors, advertising and administrative expenses (Stock Trend 2008).

c) Openness and market Barriers

Until 1972 when the Indigenization Decree was promulgated, there was no restriction to foreign investors in the Nigerian capital market. The Decree also known as Nigerian Investment Promotion Decree was amended in 1977 and it effectively restrict capital inflows to a maximum of 40% equity holding in listed security among other stringent measures. The Decree was again amended in 1989 during the privatization era. This time it was aimed at encouraging domestic investment by foreigners. However, total deregulation of the capital market was helped by the Nigerian Investment Promotion Commission Act of 1995, Foreign Exchange (Miscellaneous Provisions) Act of 1995 and recently, the Investment and Securities Act of 1999. Foreigners now participate in the Nigerian capital market both as operators and investors. There is no limit any more to the percentage of foreign holding in any company registered in Nigeria. As at 2006, foreign holdings on the Nigeria stock exchange is 4.96 on the average (BGL Financial Monitor, 2007).

3.3.3 Asset Pricing Characteristics

This deals with the efficiency of the asset pricing process in the securities market. The major yardstick for measuring efficiency in terms of market prices is the informational content inherent in such prices. A market price is touted as reflecting a strongly efficient market if it adequately and correctly reflects all available information (past, present and future) and are at the disposal of all market participants simultaneously and instantaneously. It is regarded as semi-strong where current stock prices reflect both the information contained in the historical prices and all publicly available information. Where the current prices reflect only the historical information with little predictive value, the market is regarded as weak (Inanga and Emenuga 1997).


4.1 Model Formulation

The linkage between stock market indicators and price-return volatility has occupied a central position in the development literature ( Demirguc-Kunt and Levine, 1996; Levine and Zervos, 1996; Emenuga, 1998 ). In examining this on Nigeria’s data, the study extended the classical linear regression model into a regression model with more than one explanatory variable known as a multiple regression model; multiple because multiple influences (i.e. variables) can affect the dependent variables, to explain the linkage between the stock market and new issues in an economy. This approach has got a wide application in econometric analysis (Gujarati, 2006; Akinlo and Odusola, 2000; Levine and Zervos, 1996; Obstfeld, 1994). In its stochastic form, the multiple-variable regression function can be written as follows:

Yt = B1 + B2X2t + B3X3t + B4X4t + …………+ ut

= E(Yt) + ut

Where Y = the dependent Variable

X2 and X3 = the explanatory variables

u = the stochastic disturbance term

t = the tth observation

This study used data covering 1989 to 2008 mainly from the secondary sources on the Nigerian economy and the Nigerian stock market. The choice of these secondary sources is based on their authenticity and reliability. The sources are the Nigerian Stock Exchange Fact Book 2000, The Nigerian Stock Exchange Annual Report and Accounts (for various years), Securities and Exchange Commission Annual Report and Accounts (for various years), Central Bank of Nigeria Statistical Bulletins and Federal Office of Statistic Statistical Bulletin. The statistical software utilized is MINITAB Release 11.23.

5. Analysis of the Results

5.1 Regression Results

Explaining the growth process of the capital market and price return violability is an intricate issue. This is because many variables can be used to explain the relationship. However, the concern of this price return violability on the growth of the stock exchange is linked to the derived services the stock market provides to the economy as a whole. For instance, it helped in mobilizing resources in the economy and allocates such resources in the most efficient ways to competing sectors of the economy. This analysis presents a relationship between stock market performance and the volatility of the market. We do not assert a causal relationship; rather, the coexistence of the relationship implies that many measures of risk actually compound in declining markets.

The confirmation or otherwise of this assertion as pertains to Nigeria, for the period between 1989 and 2008, was set out in a model of equation (1) above which has as its dependent variable the Market Capitalization Index (MKT CAP). In the model some variables are common to all the equations and they served as the control variables. These independent variables are level of gross domestic product at current prices(GDP) New Issues raised in the market(NEW ISSU), NSE-All Share Price Index(NSE-ALL), Consumer Price Index(CPI), Inflation Rate(INFLATIO), Exchange Rate(EXCHANGE) and Financial Deepening Ratios(FIN DEEP). See Appendix 1 The multiple regression equation of MKT CAP on all these variables using the MINITAB Release 11.23 software produced this equation (3) given as follows:

MKT CAP = – 2241 + 0.0782 NSE-ALL + 0.066 CPI – 77 INFLATION RATE + 7 EXCHANGE RATE + 178 FIN DEEPING – 0.001 GDP + 3.60 NEW ISSUES …………………………………………..(3)

In equation 3, the gross domestic product at current prices(GDP), New Issues raised in the market(NEW ISSU), NSE-All Share Price Index(NSE-ALL), Consumer Price Index(CPI), Inflation Rate(INFLATIO), Exchange Rate(EXCHANGE) and Financial Deepening Ratios(FIN DEEP) showed positive relationship such that an increase of 0.78% in the NSE-All Share Price Index(NSE-ALL), holding all the other variables constant and 3.6% of New Issues raised in the market(NEW ISSU), will lead to 1% rise in the Market Capitalization Index (MKT CAP). This conforms to theory but the statistical significance is low. The R2 value of 0.996 means that these variables in Equation (3) account for about 99% of the variation in the Market Capitalization Index (MKT CAP). The results are contained in the MINITAB output in Table 5.

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Generally, there is a positive relationship between market capitalization and stock price return represented by new issues in the market, All share price Index, gross domestic income and other variables of the stock market indices. The model proved this to be statistically significant in the testing of our Ho hypotheses, at one percent level of significance thereby confirming our alternative hypothesis in each case with the t-distribution and (n-1) degree of freedom where the numbers of predictors were seven. With 97.8 percent R-squared and 96.5 percent Adjusted R-squared, the result indicated that Market Capitalization in Nigeria is adequately explained by the model for the period between 1989 and 2009. By implications 98 percent of the variation in the Market Capitalization is explained by the independent variables.

TABLE 5: Regression Analysis

The regression equation is

MKT CAP = – 2241 + 0.0782 NSE-ALL + 0.066 CPI – 77 INFLATION RATE + 7 EXCHANGE RATE + 178 FIN DEEPING – 0.001 GDP + 3.60 NEW ISSUES

10 cases used 10 cases contain missing values

Predictor Coef StDev T P

Constant -2241 6043 -0.37 0.746

NSE-ALL 0.07823 0.09819 0.80 0.509

CPI 0.0656 0.7899 0.08 0.941

INFLATIO -76.9 120.8 -0.64 0.590

EXCHANGE 7.3 224.7 0.03 0.977

FIN DEEP 178.3 317.5 0.56 0.631

GDP -0.0006 0.2522 -0.00 0.998

NEW ISSU 3.6009 0.9043 3.98 0.058

S = 280.9 R-Sq = 99.9% R-Sq(adj) = 99.6%

Analysis of Variance

Source DF SS MS F P

Regression 7 177597705 25371101 321.47 0.003

Error 2 157845 78923

Total 9 177755550

Source DF Seq SS

NSE-ALL 1 153169584

CPI 1 16624780

INFLATIO 1 1557564

EXCHANGE 1 3964675

FIN DEEP 1 1025733

GDP 1 3999

NEW ISSU 1 1251370

Unusual Observations

Obs NSE-ALL MKT CAP Fit StDev Fit Residual St Resid 18 33358 5120.9 5123.4 280.9 -2.5 -1.09 X 19 57990 13295.0 13264.5 280.1 30.5 1.37 X 20 31451 9563.0 9573.1 280.8 -10.1 -1.41 X

X denotes an observation whose X value gives it large influence.

TABLE 6: Stepwise Regression

F-to-Enter: 4.00 F-to-Remove: 4.00

Response is MKT CAP on 7 predictors, with N = 10

N(cases with missing observations) = 10 N(all cases) = 20

Step 1 2 3 4 5

Constant -6651 -2474 -2843 -2968 -2766

CPI -0.52

T-Value -1.92

INFLATIO -164 -87 -98 -93 -83

T-Value -3.35 -2.38 -3.18 -4.58 -4.60

EXCHANGE 173 90 137 49

T-Value 2.14 1.03 2.61 1.06

FIN DEEP 408 171 176 209 220

T-Value 3.26 7.13 8.25 11.36 14.40

GDP 0.186 0.033

T-Value 2.11 0.68

NEW ISSU 3.89 5.28 5.45 3.64 3.23

T-Value 5.03 14.37 21.34 5.39 5.78

NSE-ALL 0.074 0.093

T-Value 2.77 4.68

S 263 340 322 211 213

R-Sq 99.88 99.74 99.71 99.90 99.87

6.1 Summary of major findings

The study examines the impact of price-return volatility on the stock market particularly in relationship to New Issues raised in the market between the period 1989 and 2008. The study, from the regression results, confirms that there exist positive relationship between the market capitalization and the measures of stock market development used. These relationships are statistically significant. This in essence means that the effect of New Issues on stock market growth is strong and significant. This is in contrast with Alile (1984) assertion that the Nigerian stock market contribution to gross fixed capital formation was very minimal fluctuating between 2.9 percent and 15.3 percent between 1971 and 1980. This recent development is a reflection of the removals of structural rigidities prevailing in the stock market and the economy which makes the stock market a barometer of economic activities and a market driven institution aimed at efficiency through the interplay of the forces of demand and supply.

This is even more pronounced in the increased number of quoted companies on the exchange, the implementation of the revised Securities and Investments Acts 1999 and 2007 by the regulators of the market- Securities and Exchange Commission, the use of the stock market in the re-capitalization/consolidation and reforms in the financial services sector of the economy between 2003 and 2007. The reaction of the exchange in terms of market capitalization, turnover of transactions in the face of massive withdrawal of investments by foreign portfolio investors as a result of the global financial meltdown and other local reasons. The market has been able to withstand these shocks in the economy and has not collapsed.

Another major outcome of the study was the fact that the stock market during the period was faced with legislation and policy changes. The introduction of Automatic Trading Machine, T+3 trading/delivery Scheme, Central Depository and Clearing facilities for investment instruments through the CSCS, liberalization of security pricing through the Issuing Houses, the establishment of Investment and Securities Tribunal in 2003 have all contributed to enhancing the development of the market in line with operating to international best practice. The attractiveness of the stock market as a veritable source of raising new issues of funds was therefore enhanced.

6.2 Policy Recommendations

The findings from this study raise some policy issues and recommendations, which will reinforce the link between the stock market indicators and the raising of new capital for infrastructural development of Nigeria. Given that the stock market operate in a macroeconomic environment, it is therefore necessary that the environment must be an enabling one in order to realize its full potentials. The demand for the services of the stock market is a derived demand.

The results of the study invariably showed that some serious policy issues still have to be put in place and sustained to promote stock market development in the face of global financial meltdown in order to stimulate economic growth. For example, the non-revisal of the liberalization on portfolio investment and dividend flow must be high on the reform agenda in making Nigeria a preferred destination for foreign portfolio investors in both the equity and debt markets. With the existence of a positive relationship between stock market development and issuance of new capital, it is pertinent to recommend that there should be sustained effort to stimulate productivity in both the public and private sectors.

The stock market is known as a relatively cheap source of funds when compared to the money market and other sources. The cost of raising funds put at about 6.5% in the Nigerian market is however, regarded to be very high. Efforts should be made by the operators to bring downward, this cost, so as to enhance its competitiveness and improve its attractiveness as a major source of raising funds. Considering the benefits being enjoyed by the stock market through the internationalization of its operations, there should be no policy turn-around but a sincere pursuit of this policy. The reward-to-risk relationship significantly improves in strong markets. In the context of secular bull and bear markets, this relationship further emphasizes the need to consider risk as well as reward in an investor’s investment decisions. Given the present political dispensation, all the tiers of government should be encouraged to fund their realistic developmental programmes through the stock market. This will serve as a leeway to freeing the resources that may be used in other sphere of the economy.

6.3 Conclusions

The study confirms that the stock market promotes the issuance of fresh capital. It serves as an important mechanism for effective and efficient mobilization and allocation of savings, a crucial function, for an economy desirous of growth. This study attempted to place this role in the Nigerian context for the period between 1989 and 2008. With the use of some notable stock market development indicators, the relationship between Market

Capitalization and new issues of fund was found to be positive in the face of global financial meltdown. This suggests that for a significant growth to counter the prevailing economic meltdown the focus of policy should be on measures to promote growth in the stock market. The Nigerian stock market has a bright prospect given the recent policy direction especially the abrogation of all laws that hitherto hamper its effective and efficient functioning. Also, the internationalization, the improvement in the infrastructural facilities in the market in line with what obtains in the developed market and also the present democratic dispensation will all work individually and jointly to ginger the prospect of the stock market.


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