Effect of Macroeconomic Variables on Stock Market Performance in Nigeria

Abstract

This paper aims at examining the effect of macroeconomic variables on stock market performance in Nigeria using annual time series data spanning 1981 to 2016.The data were obtained from Central Bank of Nigeria (CBN) Statistical Bulletin. Four macroeconomic variables, namely: money supply, interest rate, exchange rate and inflation rate were used as independent variables, while market capitalisation (proxy for stock market performance) was employed as the dependent variable. The results of Augmented Dickey-Fuller (ADF) test revealed that all the variables studied were stationary at first difference except money supply which was stationary at second difference. The Ordinary Least Square (OLS) regression results showed that money supply has a significant positive effect; interest rate has a significant negative effect; whereas, exchange rate has a positive but not significant effect and inflation rate has a positive but not statistically significant effect on stock market performance. The cointegration test results disclosed that there exist a long-run relationship between the macroeconomic indicators and stock market performance. The Granger Causality test results revealed that a unidirectional causality runs from money supply and exchange rate to stock market performance. In conclusion, money supply and interest rate are the true factors influencing stock market performance in Nigeria because they exhibited a significant effect on stock market performance. Whereas, exchange rate and inflation rate indicated a weak (non-significant) effect on stock market performance. Consequently, the recommendations are: monetary policies that favour the supply of money in the economy should be pursued in order to ensure a better performance of the stock market; Interest rate should be relatively low to guarantee a higher performance of the stock market because high interest rate has a significant negative effect on the Nigerian stock market.