A SECTORAL ANALYSIS OF CRUDE OIL PRICE, EXCHANGE RATE AND STOCK PRICES IN NIGERIA, (2009-2016)

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ABSTRACT

The study investigated the relationship between crude oil price, exchange rate and sectoral stock prices in Nigeria from 2009 to 2016, using quarterly data collected from the Central Bank of Nigeria (CBN) and Nigeria Stock Exchange. Indices of the Nigeria stock exchange for three sectors (NSE Banking Sector, NSE Consumer goods and NSE Oil & Gas) were considered as dependent variables, which led to the specification of three models for the study.

 The study implemented unit root with and without structural breaks to determine the order of integration and further applied a nonlinear ARDL (NARDL) which is an asymmetric extension of the standard co-integration test and the standard ARDL. The NARDL was applied to determine asymmetric effect of crude oil price shocks on stock prices.

 Findings from the analysis indicated the presence of long-run co-integration in most cases and that positive and negative oil price shocks have differential effects on stock prices across sectors. Further, positive oil price shocks have greater impact on share prices in the banking and oil & gas sectors than negative oil price shocks of the same magnitude. Oil price shocks completely transmitted to the sectors, except consumer goods sector.

The study concluded that there should be close monitoring of the banking and oil & gas sectors as well as appropriate policy actions to curtail systematic risk in the banking industry.

TABLE OF CONTENTS

Content                                                                                                             Page

Title Page                                                                                                                  i

Certification                                                                                            ii         

Dedication                                                                                                                 iii

Acknowledgements                                                                                                 iv

Abstract                                                                                                                      v

Table of Contents                                                                                                    vi

List of Tables                                                                                                            vii

List of Figures                                                                                                     viii

Appendices                                                                                                    xi        

CHAPTER ONE: INTRODUCTION

  1. Background to the Study                                                                          1

1.2      Statement of the Problem                                                                         4

1.3      Objective of the Study                                                                            6

1.4      Research Questions                                                                                     6

1.5      Hypotheses                                                                                            7

1.6      Scope of the Study                                                                             7         

1.7      Significance of the Study                                                                            8

1.8      Justification for the Study                                                                        8

1.9      Operational Definition of Terms                                                                11

Content                                                                                                               Page

CHAPTER TWO: REVIEW OF LITERATURE

2.1      Conceptual Model                                                                              12

2.2      Theoretical Framework                                                                               23

2.3      Theoretical Review of Variables                                                          31

2.4      Empirical Framework                                                                                38

2.4      Gaps in Literature                                                                                       56

CHAPTER THREE: METHODOLOGY       

3.1      Research Design                                                                                        58

3.2      Population                                                                                                 58

3.3      Data and Sources of Data                                                                        58

3.4      Model Specification                                                                                59

3.5      Estimation Method                                                                                 62       

3.6      A priori Expectation                                                                                      64

3.7      Ethical Consideration                                                                                 65

3.8      Resources and Skills Needed for the Study                                             65

CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSION OF FINDINGS

4.1      Descriptive Statistics                                                                              66

4.2      Unit Root Test Results                                                                                69

4.3      Bound Test Estimates                                                                                    76

4.3      Discussion of Long-run and Short-Run Co integration                         80

4.4      Post Estimation Test and Result                                                               95

Content                                                                                                           Page

CHAPTER FIVE: SUMMARY, CONCLUSION

AND RECOMMENDATIONS     

5.1      Summary                                                                                                                     101

5.2      Conclusion                                                                                                                  104

5.3      Recommendations                                                                                                      104

5.5  Limitation of the Study                                                 106

5.6  Suggestion for Further Studies                                          106

5.4      References                                                            107

LIST OF TABLES

Table                                                                  Page

4.1.1A     Descriptive Statistics before Transformation to Log                     68

4.1.1B     Descriptive Statistics after Transformation to Log                      69

4.2.1A     Unit Root without Structural Breaks before Transformation to Log        71

4.2.1B     Unit Root without Structural Breaks after Transformation to Log         72

4.2.2A     Unit Root with Structural Breaks before Transformation to Log           74

4.2.2B     Unit Root with Structural Breaks after Transformation to Log       75

4.3A       Bound Test Estimates for Model 6                                  77

4.3B       Bound Test Estimates for Model 7                                  78

4.3C       Bound Test Estimates for Model 8                                  79   

4.4.1A     Normalized Long-Run Estimates for Model 6                   82

4.4.1B     Short-Run Estimates for Model 6                                   84

4.4.2A     Normalized Long-Run Estimates for Model 7                   86

4.4.2B     Short-Run Estimates for Model 7                                   88

4.4.3A     Normalized Long-Run Estimates for Model 8                   91

4.4.3B     Short-Run Estimates for Model 8                                   94

4.6        Ramsey Rest Test of Linearity                               97

LIST OF FIGURES

Figure                                                                       Page

4.5.3A     CUSUM Stability Test for NSEBNK                                   98

4.5.3B     CUSUM Stability Test for NSECONS                            99

4.5.3C     CUSUM Stability Test for NSEO&G                                   100       

APPENDICES

Appendix                                                              

A    E-views Code to Generate Crude Oil Price Shocks                        

B    Unit Root without Structural Breaks, before Transformation to Log      

C    Unit Root with Structural breaks before Transformation to Log                

D    Descriptive Statistics before Transformation to Log                          

E    Descriptive Statistics after Transformation to Log                           

F    Unit Root after Transformation to Log without Structural Break Dates         

G    Unit Root Result with Structural Breaks before Transformation to Log         

H    Unit Root Result with Structural Breaks after Transformation to Log          

I    Non-Linear ARDL, Short run and Long -run Results                             

J    LM Serial Correlation Test Result                                      

K    ARCH LM Heteroschedasticity Test Result                                

L    Descriptive Statistics for Models                                                                   

CHAPTER ONE

INTRODUCTION

  1. Background to the Study

Nigerian economy has relied heavily on importation of goods from foreign countries and has depended on crude oil generated revenue for over three decades. Crude oil revenue is the largest contributor to the Gross Domestic Product (GDP) in Nigeria, (CBN, 2015). The Nigerian government makes use of the international crude oil price as a benchmark price in budgetary preparations in the country. This implies that an oil exporting economy will experience boom when there is an increase in crude oil production and the crude oil market price exceeds the benchmark price set by government while the economy may some form of recession or sluggishness in the economy when the price falls below benchmark price Clifford K. (March 10, 2017). Such frictions may reflect in the form of inability of the government to fund the national budgets due to a reduction in foreign exchange earnings (Adaramola 2015) the recent situation in Nigeria during the periods that recorded low crude oil price, many states in the country were unable to pay salaries, exchange rate depreciated further and many people lost their jobs (Alechenu 2016, March 25).

Historical data collected from the CBN has shown that crude oil price began falling persistently since November 2013 and got to its lowest price in February 2016. The implications of this fall price reflected in the form of decline in revenue in Nigeria and as a result, most states could not afford to pay salaries and reduction in accumulated foreign exchange which is to be used for importation of consumer and capital goods Gabriel (June 15, 2015). This scarcity of foreign exchange led to a further depreciation in the National currency (Alechenu J. 2016, March 25).The Naira was fast approaching N500 to $1 and finally exceeded N500 to $1 in the parallel market between January and February 2017 (NAN, 2017, February 3). The naira was also traded for N617 and N527 for one Pound Sterling and Euro respectively. However, the naira is currently appreciating in the parallel market in Nigeria (NAN, 2017, February 3). Thus, this suggests that the implications of crude oil volatility and exchange rate volatility on the economy cannot be overlooked. This study investigated how crude oil price shocks and exchange rate affects sectoral stock prices in Nigeria.

A SECTORAL ANALYSIS OF CRUDE OIL PRICE, EXCHANGE RATE AND STOCK PRICES IN NIGERIA, (2009-2016)