THE IMPACT OF MACROECONOMIC INDICATOR ON SHARE PRICING IN NIGERIA CAPITAL

MARKET
BY ADEKOYA ADENIYI ADEBOWALE
OCTOBER, 2016

INTRODUCTION
Naik and Padhi (2012) asserted that stock markets play a pivotal role in growing industries and commerce of a
country that eventually affect the economy. Its importance has been well acknowledged in industries and
investors perspectives. The stock market avail long-term capital to the listed firms by pooling funds from
different investors and allow them to expand in business and also offers investors alternative investment avenues
to put their surplus funds in. The investors carefully watch the performance of stock markets by observing the
composite market index, before investing funds (Naik and Padhi, 2012).
The market index provides a historical stock market performance, the yardstick to compare the performance of
individual portfolios and also provides investors for forecasting future trends in the market.
According to Bhanu, (2013) stock markets are said to reflect the health of the countrys economy. On the other
hand, major economic indicators determine stock market movements to a large extent. From a thorough analysis
of the various economic indicators and its implications on the stock markets, it is observed that stock market
movements are largely influenced by broad money supply, inflation, interest rate, foreign exchange rate, credit/
deposit ratio and fiscal deficit apart from political instability. Besides, fundamental factors like corporate
performance, industrial growth, etc., always exert a certain amount of influence on the stock markets.
According to Jhingan (1997), economic growth occurs when an economys productive capacity increases, which
in turn is used to produce more goods and services.
Statement of the Problem
The question of whether or not stock prices can be predicted by macroeconomic indicators in an economy is of
serious concern both to the academics as well as the practitioners all over the world. Stock markets are one of
the most important components of modern economic structure. Macroeconomic condition may have significant
impacts on both prices of stocks and volume traded. With this respect, understanding the interaction between
stock prices and macroeconomic variables gains importance. By knowing these relationship, investors can earn
profits by exploiting past information of the variables. Therefore, the issue of whether stock prices and
macroeconomic variables are related or not have requires considerable attention. Many works have been done in
past few decades to examine the relationship between stock prices and financial futures as well as the currency
exchange (Hen et al., 2006). However, in the Nigerian context there is minimal empirical or theoretical
consensus on the issue of whether these variables are related and the direction of causation if they are related or,
at least, different studies which have been conducted for different markets may give diverse findings. This study
thus aims to shed some light on interrelation between macroeconomic variables and stock prices in the Nigerian
capital market.
Objectives of the Study
1. To determine the impact of Inflation on Nigerian stock exchange all shares index
2. To measure the impact of Interest Rate on Nigerian stock exchange all shares index
3. To measure the impact of foreign exchange rate on Nigerian stock exchange all shares index
Relevant Research Hypotheses
To achieve this objective, the following hypotheses will be tested;
H0; Inflation rate does have impact on the Nigerian Stock Exchange all shares index.
H0; Interest Rate does not have impact on the Nigerian stock exchange all shares index
H0; Foreign exchange rate does not have any impact on the Nigerian Stock Exchange all shares index.
Scope of the Study
The study covers the impact of macroeconomic indicator on share pricing in Nigeria Capital Market. The scope
of the study will cover 1990-2013. The scope of the study also focuses on three major macroeconomic
indicators namely; inflation rate, interest rate and foreign exchange rate.
LITERATURE REVIEW
Several attempts have been made to identify or study the factors that affect stock prices. Some researchers have
also tried to determine the correlation between selected factors (internal and external, market and non-market
factors, economic and noneconomic factors) and stock prices. The outcomes of the studies vary depending on
the scope of the study, the assets and factors examined. The Capital Asset Pricing Model (CAPM) assumes that
asset price depends only on market factor. Hence, it is tagged a one factor model. On the other hand the
Arbitrage Pricing Technique/Model (APT) which could be taken as a protest of CAPM believes that the asset
price is influenced by both the market and non-market factors such as foreign exchange, inflation and

unemployment rates. However, one of the defects of APT in spite of its advancement of asset pricing model is
that the factors to be included in asset pricing are unspecified.
AlTamimi (2007) identified a number of company internal factors and external factors as influencers of asset
prices. He developed a simple regression model to measure the coefficients of correlation between the
dependent and independent variables as follows: SP = f (EPS, DPS, OL, GDP, CPI, INT, MS); where, SP: Stock
price; EPS: Earnings per share; DPS: Dividend per share; OL: Oil price; GDP: Gross domestic product; CPI:
Consumer price index; INT: Interest rate and MS: Money supply. He discovered that the firms internal factors
exercise the most significant impact on stock prices.
On the contrary, the prior findings of Chen (1991) in a study covering the USA suggest that future market stock
return could be forecasted by interpreting some macroeconomic variables such as default spread, term spread,
one month treasury-bill rate, industrial production growth rate, and the dividendprice ratio. Mukherjee and
Naka (1995) used vector error correction approach to model the relationship between Japanese stock return and
macroeconomic variables. Co integration relation was detected among stock prices and the six macroeconomic
variables, namely exchange rate, inflation rate, money supply, real economic activity, long-term government
bond rate and call money rate.
The study by Flannery and Protopapadakis (2002) re-evaluate the effect of some macroeconomic series on US
stock. Among these series, six macro variables, namely: balance of trade, housing starts, employment, consumer
price index, M1 and producer price index seem to affect stock returns. On the other hand, two popular measures
of aggregate economic activity (real GNP and industrial production) do not appear to be related with stock
returns.
Some brilliant attempts have also been made by Nigerian researchers to investigate the relationship between
macroeconomic variables and stock prices. Akinnifesi (1987) used a disaggregated analysis to investigate the
relationship between exchange rate and stock prices fluctuation. He found that a depreciating Naira exchange
rate increases stock prices.
Soyode (1993) made an attempt to test the association between stock prices and macroeconomic variables as
exchange rate, inflation and interest rate. He found that the macro economic variables that cointegrated with
stock prices are consequently related to stock returns.
Amadi, Oneyema and Odubo (2000) employed multiple regression to estimate the functional relationship
between money supply, inflation, interest rate, exchange rate and stock prices. Their study revealed that the
relationship between stock prices and the macroeconomic variables are consistent with theoretical postulation
and empirical findings in some countries. Though, they found that the relationship between stock prices and
inflation does not agree with some other works done outside Nigeria.
Nwokoma (2002), attempts to establish a long-run relationship between the stock market and some of
macroeconomic indicators. His result shows that only industrial production and level of interest rates, as
represented by the 3-month commercial bank deposit rate have a long-run relationship with the stock market. He
also found that the Nigeria market responds more to its past prices than changes in the macroeconomic variables
in the short run.
Ologunde, Elumilade and Asaolu (2006), examined the relationships between stock market capitalization rate
and interest rate. They found that prevailing interest rate exerts positive influence on stock market capitalization.
They also found that government development stock rate exerts negative influence on stock market
capitalization rate and prevailing interest rate exerts negative influence on government development stock rate.
Their findings seem to take interest rate as the lending rate. If deposit rate increases, theoretically, investors will
switch their capital from share market to banks. This will exert a negative impact on stock prices. Therefore this
work used the deposit rate to express interest rates in Nigeria. Earlier studies have revealed that the impact of oil
prices depends on whether a country is an oil exporting or oil importing. Crude oil accounts for over 60% of
GDP in Nigeria and findings from the six oil producing countries of the Golf Cooperative Council (GCC) show
that there is a link between oil price and stock returns. Again, Nigeria exports crude oil and at the same time the
country is a major importer of oil. In view of the above, oil price is a major variable in the model for this work.
With the exemption of Olowe (2007), this variable was omitted in many of the related works in Nigeria.
RESEARCH METHODOLOGY
The Correlational or Prospective Research Design is adopted in this study. This method is adopted to examine
the pattern of association between the variables under study. This type of research depicts the state of affairs as it
exists with the intent of measuring the relationship between the variables (Kothari, 2004). The researcher has no
control over the variables and can only report what has happened or what is happening. The researcher attempts
to discover effect of these variables on each other.
A sample is a subject of the target population which the researcher intends to generalize the findings (Cohen and
Marrison, 1994). The sample size for this study was selected using convenience sampling. The sample size for
this study shall constitute data on macroeconomic indicators (inflation rate, interest rate and foreign exchange
rate) and all share indexes of firms listed on the Nigeria stock exchange from1990-2013.

Method of Data Analysis

The data obtained from the instruments were subjected to various statistical analyses. Data collected from
secondary source were analyzed using frequencies and percentages.
The relationship between the variable will be determined using Correlation and regression analysis. According
to Adekoya (2012), correlation analysis measures the degree of association between two or more variables. He
further stated that the squared of the correlation coefficient will give rise to the coefficient of determination. The
coefficient of determination shows the proportion or percentage of total variation in the total variation that can
be accounted for by variation in the explained variation.
The statistical package for the social sciences (SPSS) program was used as a tool for processing and analyzing
data. SPSS package was chosen following it wide application in data analysis and it is perceived as one of the
most applied statistical package in social sciences and because it offers the possibilities of wide range of
statistical.
DATA ANALYSIS AND INTERPRETATION
The study covers the impact of macroeconomic indicator on share pricing in Nigeria Capital Market. The scope
of the study will cover 1990-2013. The study focuses on three major macroeconomic indicators namely;
inflation rate, interest rate and foreign exchange rate.
Dependent Variable: ALL_SHARES_INDEX
Method: Least Squares
Sample: 1990 2013
Included observations: 24
Variable

Coefficient

Std. Error

t-Statistic

Prob.

FOREIGN_EXCHANGE_RATE
INFLATION_RATE
INTEREST_RATE
C

1723.682
-1531.451
-15006.27
394873.6

490.6446
1422.860
6007.694
164036.6

3.513097
-1.076318
-2.497841
2.407229

0.0022
0.2946
0.0213
0.0259

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

0.659822
0.608795
109678.5
2.41E+11
-310.3941
12.93091
0.000064

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

190469.4
175355.5
26.19951
26.39585
26.25160
1.399589

Estimation Equation:
Substituted Coefficients:
Foreign exchange rate and interest rate were statistically significant at 1%, level, showing that the level foreign
exchange rate and interest rate of an economy at any given time impact on all shares index. The coefficients of
these explanatory variables portray that a unit increase in interest rate and foreign exchange rate will result to
about -15006.27decreases and 1723.682 increases inall shares index respectively. The interest rate was not
statistically at 1%, 5% and 10% respectively but supports the apriori expectation of negative relation between all
shares index and inflation rate. The regression coefficients show that every 1% increase in inflation rate will
cause all shares index to fall by 1532.5
For the test of reliability, the t-values of 3.51, -2.497 revealed that the regression coefficient for foreign
exchange rate and interest rate are statistically significant ant 5% level of significant., while the t value of -1.08
was lower than the t-tabulated values at 1%, 5% and 10% significant levels which show that the parameter
estimates are insignificant at all the levels. Therefore, the null hypotheses are accepted while the alternatives
hypotheses are rejected meaning that the inflation rate have no significant effects on all shares index.
The F-statistic is a measure of the overall significance of the regression model. The output revealed that the
calculated F-value is 12.9. This was statistically significant at 1% level of significance. The null hypothesis of
the significance of the explanatory variables employed is rejected at 5% level.

4.4
Discussion of Findings
Table 4.2 shows the least square regression output establishing the relationship between all shares index, foreign
exchange rate, inflation rate, and interest rate for the period 1990-2013.
The results showed the coefficient of determination, a measure of the general significance of the explanatory
variables. The value of the R-squared implies that about 65.9% variations in all shares index are explained by
the variations in explanatory variables of foreign exchange rate, inflation rate, and interest rate.
Foreign exchange rate and interest rate were statistically significant at 1%, level, showing that the level foreign
exchange rate and interest rate of an economy at any given time impact on all shares index. The coefficients of
these explanatory variables portray that a unit increase in interest rate and foreign exchange rate will result to
about -15006.27decreases and 1723.682 increases in all shares index respectively. The interest rate was not
statistically at 1%, 5% and 10% respectively but supports the apriori expectation of negative relation between all
shares index and inflation rate. The regression coefficients show that every 1% increase in inflation rate will
cause all shares index to fall by 1532.5
For the test of reliability, the t-values of 3.51, -2.497 revealed that the regression coefficient for foreign
exchange rate and interest rate are statistically significant ant 5% level of significant., while the t value of -1.08
was lower than the t-tabulated values at 1%, 5% and 10% significant levels which show that the parameter
estimates are insignificant at all the levels. Therefore, the null hypotheses are accepted while the alternatives
hypotheses are rejected meaning that the inflation rate have no significant effects on all shares index.
The F-statistic is a measure of the overall significance of the regression model. The output revealed that the
calculated F-value is 12.9. This was statistically significant at 1% level of significance. The null hypothesis of
the significance of the explanatory variables employed is rejected at 5% level.
SUMMARY OF FINDINGS
The study covers the impact of macroeconomic indicator on share pricing in Nigeria Capital Market. The scope
of the study will cover 1990-2013. The study focuses on three major macroeconomic indicators namely;
inflation rate, interest rate and foreign exchange rate. To achieve the objectives of this study, data on the
identified variable were collected for the period 2001-2013and were analysed according to the research
objectives. The study came up with findings that are of prominent value to the impact of macroeconomic
indicator on share pricing in Nigeria Capital Market.
The results showed the coefficient of determination, a measure of the general significance of the explanatory
variables. The value of the R-squared implies that about 65.9% variations in all shares index are explained by
the variations in explanatory variables of foreign exchange rate, inflation rate, and interest rate.
Foreign exchange rate and interest rate were statistically significant at 1%, level, showing that the level foreign
exchange rate and interest rate of an economy at any given time impact on all shares index. The coefficients of
these explanatory variables portray that a unit increase in interest rate and foreign exchange rate will result to
about -15006.27decreases and 1723.682 increases in all shares index respectively. The interest rate was not
statistically at 1%, 5% and 10% respectively but supports the apriori expectation of negative relation between all
shares index and inflation rate. The regression coefficients show that every 1% increase in inflation rate will
cause all shares index to fall by 1532.5
CONCLUSION
Macroeconomic indicators are very crucial in planning the Nigeria economy. This is because the indicators are
supposed to determine the growth and development of the economy as well as key institutions within it.
Knowledge about pattern of movement in share prices is the toast of proposed and current investors in Nigeria
brewery industry. The financial consultants and the stock brokers need to determine the trend in share price
movement within an industry to enable them forecast as well as project into the future to speculate for
investment in shares on behalf of and for the benefit of their clients. This information is also relevant to research
institutes, Central Banks, the planning commission, professional associations, the financial reporting council,
budget office, capital market, academic institutions, world bank and so on, for setting attainable goals and
strategies.
The research reveals that positive relationship exists between the dependent variable (share price proxy by all
shares index) and the independent variables (inflation rate, foreign exchange rate and interest rate) while
negative relationship exists between interest rate and share price. Significant relationship was found between
foreign exchange rate and share price as well as between interest rate and share price as about 66% of the
variations in share price could be explained by the independent variables. Positive and strong correlation exists
between share price and independent variables used in the study. Interest rate and foreign exchange rate are
therefore key determinants of share price movements in the Nigeria. This means that reasonable predictions as
to share price changes could be made by the analysis of fluctuations in interest rate and foreign exchange rate.
The direction and weight of the relationship between share price and interest and exchange rates is also of
paramount importance to planners of the economy considering the multiplier effect of less than a naira
fluctuation in these macroeconomic variables on the growth and development of the Nigeria economy.

RECOMMENDATION
Based on the findings from the study, we recommend as follows:
I.
II.
III.
IV.

That government through the central bank should assist intensify effort in improving the monetary
policy that will engender favourable interest rate
That government should formulate strategies towards stabilizing and reducing the rate of inflation as it
plays a significant role in share price determination.
The foreign exchange rate regime should be properly monitored by the monetary authority to ensure it
stability and minimize fluctuation.
Firms trading on the Nigerian capital market should consider the macroeconomic indicators as an
integral component in the determination of share prices.

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APPENDIX
All Shares Index, Foreign Exchange Rate, Interest Rate and Inflation Rate From 1990-2013
Years
All Shares Index
Foreign Exchange Rate
Interest Rate
Inflation Rate
1990

5083.90

8.00

27.70

7.50

1991

8059.40

9.90

20.80

12.70

1992

11172.20

17.00

31.20

44.81

1993

14748.30

22.00

18.32

57.17

1994

22958.70

22.00

21.00

57.03

1995

45781.40

22.00

20.80

72.81

1996

71461.70

22.00

20.86

29.29

1997

91663.10

22.00

23.32

10.67

1998

71542.50

22.00

21.34

7.86

1999

63170.30

93.00

27.20

6.62

2000

80414.10

102.00

21.55

8.94

2001

122220.90

112.00

21.34

18.87

2002

139582.40

121.00

29.70

12.89

2003

186718.74

129.00

22.47

14.03

2004

296863.81

134.00

20.62

15.01

2005

274520.60

132.00

19.47

17.85

2006

304122.60

129.00

17.30

8.24

2007

585279.70

126.00

17.30

5.38

2008

605096.42

119.00

16.10

11.60

2009

277098.55

149.00

19.00

30.38

2010

297307.12

151.00

15.70

11.76

2011

280723.76

154.00

22.42

3.55

2012

281191.45

157.00

23.79

0.99

2013

434484.93

157.00

24.69

2.42

Source: Central Bank of Nigeria & National Bureau of Statistics

, 2014