ABSTRACT
From the middle of the twentieth century, crude oil has become one of the main indicators of economic activities due to its importance in the supply of the World’s energy demands. Nigeria as one of the major suppliers of crude oil in the international market has depended so much in oil price in making their annual budgets. Oil price changes influence economic activities as it reacts to the vagaries of both supply and demand forces with overarching consequences on other critical sectors of the Nigerian economy. Expectedly, it could be argued that if oil affects real economic activities, it will equally affect the earnings of companies through which oil is a direct or indirect cost of operation. If on the other hand, the stock market is inefficient, stock returns might be slow as is the case in Nigeria. A number of studies on the relationship between oil price and stock markets have focused on explanatory variables selected from developed economies. The study sought to: (i) examine the impact of oil price shock on the value of shares traded on the floor of Nigerian stock market (ii) evaluate the impact of oil price on the market capitalization of firms quoted in the Nigerian stock market, and (iii) explain the impact of oil shock on turnover ratio of stocks in the Nigerian stock market. This study adopted the ex-post facto research design. The Ordinary Least Squares regression model was used to test the hypotheses. Findings showed that international oil price shock had a positive and significant impact on the value of shares traded at the Nigerian stock market (α = 0.34, t-value = 4.67, p < 0.05, R2 = 0.87, Adj r2 = 0.82, F-statistic = 111.58, D.W = 1.85). International oil price shock had positive and significant impact on market capitalization ratio at the Nigerian stock market (α = 0.41, t-value = 5.15, p < 0.05, r2 = 0.88, Adj r2 = 0.85 F-statistic = 112.12, D.W = 1.86). International oil price shock had positive and non-significant impact on turnover ratio of the Nigerian stock market (α = 0.64, t-value = 1.82, p > 0.05, r2 = 0.82, Adj r2 = 0.78, F-statistic = 110.97, D.W = 1.72). This study thus concludes that oil price shock is an important factor which determines the direction and size of the stock market. We therefore recommend amongst others that revenue from oil be prudently utilized in order for it to impact more on the size of the stock market.
TABLE OF CONTENTS
Title Page.      .            .          .          .          .          .          .          .          i
Declaration.    .            .          .          .          .          .          .          .          .          ii
Approval Page.          .         .          .          .          .          .          .          .          iii
Dedication.    .                .          .          .          .          .          .          .          iv
Acknowledgments.    .  .          .          .          .          .          .          .          v
Abstract.        .  .          .          .          .          .          .          .          .          vi
Table of Contents.     .        .          .          .          .          .          .          .          vii
List of Tables. .             .          .          .          .          .          .          .          xi
List of Figures .          .  .          .          .          .          .          .          .          xii
Chapter One: Introduction.        .          .          .          .          .          .          1
1.1      Background to the Study.     .         .          .          .          .          .          1
1.2      Statement of the Problem.   .          .          .          .          .          .          2
1.3      Objectives of the Study.              .          .          .          .          .          5
1.4      Research Questions    .     .          .          .          .          .          .          5
1.5      Research Hypotheses. .             .          .          .          .          .          5
1.6      Scope of the Study.   .                .          .          .          .          .          5
1.7      Significance of Study.              .          .          .          .          .          .          6
           References.   .               .          .          .          .          .          .          8
Chapter Two: Review of Related Literature.    .          .          .          9
2.1      Conceptual Framework.         . .          .          .          .          .          9
2.1.1   Concept of Oil Price and Oil Price Movement.         .          .          9
2.1.2   The Concept of Supply Shocks.                 .          .          .          .          10
2.1.3   The Concept of Demand Shocks.            .          .          .          .          11
2.1.4   The Concept of Stock Market.                    .          .          .          .          12
2.1.5   The Concept of Market Efficiency.             .          .          .          .          14
2.1.6   The Concept of Weak Form of Efficient Market Hypothesis..          20
2.2      Theoretical Review.   .              .          .          .          .          .          23
2.2.1   The Dutch Disease Syndrome Theory.           .          .          .          23
2.2.2   Expectational Theories of Oil.           .  .          .          .          .          23
2.3.     Empirical Review.      .             .          .          .          .          .          24
2.3.1   Major Global Historical Oil Shocks.  .      .          .          .          .          24
2.3.2   Financial Speculation in Oil Futures Markets.          .          35
2.3.3   The Role of OPEC.    .          .             .          .          .          36
2.3.4   Consequences of Exogenous Oil Price Shocks.            .          37
2.3.4.1 The Direct Effects of an Exogenous Oil Price Shock on Real GDP. 38
2.3.4.2 Direct effects: Supply channel of transmission.        .          .          . 38
2.3.4.3 Direct Effects: Demand channel of transmission.     .          .          39
2.3.4.4 The Direct Effects of an Exogenous Oil Price Shock on Inflation.  40
2.3.4.5 The Indirect Effects of an Exogenous Oil Price Shock on Real GDP.41
2.3.4.6 Indirect effects: Reallocation effect. .  .          .          .          .          41
2.3.4.7 Indirect effects: Uncertainty effect.  .                .          .          .          42
2.3.4.8 Indirect effects: Systematic monetary policy responses.       .          43
2.3.5   Oil Price Shocks: Exporting countries Vs Importing Countries.       44
2.3.6   The Role of the Capital Market in Nigeria.   .            .          .          45
2.3.7   Development of the Nigeria Capital Market. .     .          .          46
2.3.8   Oil Prices and Economic Activities.  .        .          .          .          50
2.3.9   Oil Prices and Monetary Policy.        .                .          .          52
2.3.10 Asymmetric Effect of Oil Price Changes.     . .          .          .          53
2.3.11 Stock Market and Economic Activity.       .          .          .          54
2.3.12 Oil Prices and Stock Market. .          .  .          .          .          .          57
2.2.13 Stock Market Efficiency.       .          .           .          .          .          78
2.3.14 Financial Liberalization and stock market Returns.   .      .          81
2.3.15 Trading Volumes and Volatility of Stock Prices.      .          .          .    83
2.3.16 Daily volatility and stock market Returns.            .        .          84
2.3.17 Intra- Day Volatility and Stock Market Returns.      .          .          86
2.4      Summary of Review of Literature.    .          .          .          .          88
           References.    .          .          .          .          .          .          .          91
Chapter Three: Methodology.        .          .                  .          .          111
3.1      Research Design.                .          .          .          .          .          111
3.2      Model Specification.   .          .          .          .          .          .          111
3.3      Description of Explanatory Variable. ..          .          .          .          113
3.3.1   Dependent Variables. .          .                 .          .          .          113
3.3.2   Independent Variable.                  .          .          .          .          .          113
3.3.3   Control Variables.      .          .          .          .          .          .          113
3.4      Techniques of Analysis.           .          .          .          .          .          114
3.5      Diagnostic Tests.        .       .          .          .          .          .          114
3.5.1   Multicolinearity.           .          .          .          .          .          .          114
3.5.2   Heteroscedasticity.    .         .          .          .          .          .          114
3.5.3   Autocorrelation.         .      .          .          .          .          .          114
3.5.4   Normality.       .          .          .          .          .          .          .          118
           References.           .          .          .          .          .          .          119
Chapter Four           : Data Presentation and Analysis.   .          .          .117
4.0      Prelude.          .             .          .          .          .          .          .          117
4.1      Data Presentation.      .   .          .          .          .          .          .          117
4.2.     Diagnostic Test.      .          .          .          .          .          .          .          124
4.2.1   Multicollinearity test. .     .          .          .          .          .          .          124
4.2.2   Heteroskedasticity Test.     .          .          .          .          .          .          125
4.2.3   Autocorrelation Test. .                 .          .          .          .          .          126
4.2.4   Normality Test.          .    .          .          .          .          .          .          128
4.3      Test of Hypotheses.   .       .          .          .          .          .          .          128
4.3.1   Test of Hypothesis One.       .          .          .          .          .          .          129
4.3.2   Test of Hypothesis Two.        .      .          .          .          .          .          131
4.3.3   Test of Hypothesis Three.    .          .          .          .          .          .          134
4.4      Implication of Findings.     .          .          .          .          .          .          136
References.   .       .          .          .          .          .          .          140
Chapter Five:           Summary of Findings, Conclusion and Recommendations.        .          141
5.1      Summary of Finding. .         .          .          .          .          .          141
5.2      Conclusion.    .           .          .          .          .          .          .          141
5.3      Recommendations.       .          .          .          .          .          .          142
5.3.1   Contributions to Knowledge. .      .          .          .          .          .          143
5.3.2   Recommendation for Further Studies.     .          .          .          .          143
           Bibliography. .          .            .          .          .          .          .          134
Appendix.     .          .          .          .          .          .          .          .          168
LIST OF TABLES
Table 4.1: Values of Total Deposit Volume, Loan and Advances, Interest (deposit and lending) Rates.    .          .          .          .          .          118
Table 4.2: Correlation matrix. .            .          .          .          .          124
Table 4.3: Heteroscedasticity Test for the First Hypothesis. .          125
Table 4.4: Heteroscedasticity Test for the second Hypothesis.   .       125
Table 4.5: Heteroscedasticity Test for the third Hypothesis. .     126
Table 4.6: Autocorrelation Test for the First Hypothesis.     .          126
Table 4.7: Autocorrelation Test for the Second Hypothesis. .          127
Table 4.8: Autocorrelation Test for the Third Hypothesis.    .   127
Table 4.9: Normality test of the multiple regression models. .      .          128
Table 4.10: Regression Result of Hypothesis One.   .          .             .          129
Table 4.11: Newey-West HAC Standard Errors & Covariance.     .    131
Table 4.12: Regression Result of Hypothesis One.   .          .          .          132
Table 4.13: Regression Result of Hypothesis Three. .          .          .          134
LIST OF FIGURES
Figure 4.1: Market Capitalization Trend.       .          .          .Â
Figure 4.2: Graphical Representation of changes in Market Capitalization from 1986-2013 120
Figure 4.3: Graphical Representation of the Value of Shares Traded from 1986-2013. 121
Figure 4.4: Graphical Representation of Nigerian Turnover Ratio from 1983-2013. 122
Figure 4.5:
Graphical Representation of change in Oil Price Shock from 1986-2013.
123
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
From the middle of twentieth century onwards, crude oil has become one of the main indicators of economic activity worldwide, due to its outstanding importance in the supply of the world’s energy demands. Nigeria as one of the major suppliers of crude oil in the international market has depended so much in the oil price in making their annual budgets.
According to Odusami (2006:1), fluctuations in the price of crude oil have significant implications for a Varity of economic activities. For example, Hamilton (1983) showed that significant increase in oil price preceded every post World War 11 recession in the U.S. Mork (1989:20) examined the evidence of asymmetric response of output to oil price increase and decrease and find evidence of negative correlation between oil prices increase and output growth. Lee and Ratti (1995:53) scrutinized the effect of real oil price on output and show that in long periods of economic stability, oil price shock affects output in U.S., Japan, Germany, Canada, France, UK and Norway.
It could be seen that the public has been particular concerned about oil price fluctuations. These fluctuations have become one of the current affairs published on the front pages by the vast majority of the world’s newspapers (especially in US), mainly from the Yom Kippur War of October 5, 1973. Thus, the prevailing view among economists is that there is a strong relationship between the growth rate of a country and oil price changes.
Agren (2006:4) states that the oil price influence on stock markets is an interesting and important issue, even more so recently when the world oil price has displayed great instability. He further maintains that during April of 2006, the price of crude oil was in the neighborhood of (U.S) $70 per barrel, which is well above the price of $20 during most of the 1990’s. In a recent survey of oil in the Economist, Vaitheeswaran (2005:16) proposes that the explanation for the rise is that oil markets have seen an abnormal combination of tight supply, surging demand, and financial speculation. One might also consider the unstable political situation in the Middle East. And the activities of militant groups in the Niger Delta region of Nigeria a candidate cause for the rise in oil prices.
Thus, as posited by Jones, Leiby and Paik (2004:8) that the stock market has been viewed as an information collection and processing institution. The asset prices it establishes depend on information about future prospects as well as current conditions facing firms. The efficiency with which stock markets process information has been a subject of intense study for several decades.
If stock-price or rate-of-return forecasts cannot be improved upon by use of any of other information, the case can be made that the stock market is already using all publicly and privately available information in the formation of those prices. Reasonable to expect that the stock market would absorb the information about the consequences of an oil price shock and incorporate it into stock prices very quickly. Since asset prices are the present discounted value of the future net earnings of firms, both the current and the future impacts of such a shock should be absorbed into prices and returns without having to wait for those impacts to actually occur.
There exist a few research works that links oil prices to stock markets. Jones and Kaul (1996) test whether stock markets are rational in the sense that they fully adjust to the impact of oil Shocks on dividends. In their study of the U.S, Canadian, Japanese, and U.K stock markets, initially show that all the markets respond negatively to oil shocks. Huang, Masulis, and Stoll (1996) looked at the oil futures market and the stock market using daily data. Sadorsky (1999) on the other hand studies the impact of real oil price shocks on real stock returns by estimating vector auto regressions, including U.S industrial production and short interest rates. The study separates positive from negative oil shocks, and, contrary to Huang et al (1996), presents evidence that shocks to the oil price do affect aggregate stock returns Basher and Sadorsky (2004), using a multifactor arbitrage pricing model, find strong evidence that oil price risk impacts returns of emerging stock markets.
