This study examined empirically the impact of inflation on Nigerian stock market returns,within the period 1985 – 2012. The Ordinary Least Square (OLS) technique was utilized to empirically assess the impact of our modeled independent variable/regressor on our chosen dependent variable. The hypothesis that inflation significantly affects stock market returns was tested and validated with the results. Our findings gave rise to statistically significant t-statistics which further confirms the effect of the independent variable on the dependent variable. Some of the recommendations to further reduce any negative impact of inflation on stock market returns in Nigeria are more efforts at formulating and implementing favourable macroeconomic and investment friendly policies. Others include the expansion of the stock market in terms of depth and breadth, the attraction of foreign direct investment and foreign portfolio investment into the Nigerian economic landscape and the implementation of sound economic policies to further reduce the possible negative impact of macroeconomic variables like inflation on stock market returns.



Title page———i


Declaration ———iii

Dedication ———iv



Table of Contents ——– 1



A common problem plaguing the growth of developing countries like Nigeria is the shallow nature of its financial markets both in terms of breadth and depth. Indeed financial markets play an important role in the process of economic growth and development by facilitating savings and channeling funds from savers to investors. While there have been numerous attempts to develop the financial sector, emerging markets like that of Nigeria are also facing the problem of macroeconomic variable fluctuations and unpredictability in numerous fronts – arising from fluctuations in inflation, exchange rate and changing levels of financial openness – including volatility of its financial sector.

The degree of stock market return and volatility if known can help forecasters predict the path of an economy’s growth and attendant volatility levels. The structure of fluctuations and volatility can imply that investors now need to hold more stocks in their portfolio to achieve diversification. This case is more serious for relatively small (compared to developed economies) and emerging economies like Nigeria who is currently attempting to further deepen its financial sector by developing its securities market. Unlike mature stock markets of advanced economies, the stock markets of less developed economies like Nigeria began to develop rapidly only in the last two decades, and are sensitive to factors such as changes in the levels of economic activities, changes in the political and economic environment as well as changes in general macro economic variables.

To date economic theory and empirical studies consider stock prices, stock returns and numerous other macroeconomic variables as the best indicators of changes in the market index and stock market returns in any economy. This intellectual curiosity gained ascendancy in the last two decades due to the increasing belief that real economic activities often impact on stock prices and returns in the stock market (Osamwonyi and Evbayiro-Osagie,2012). For instance, Chen Roll and Ross (1986) argued and empirically showed that movements in macroeconomic variables affect future dividends as well as discount rates, thus affecting stock prices. Smith (1990), in his study of the American stock price behaviour, observed that stock prices usually decline shortly (on average, for months), before a recession begins and rise shortly before a recession ends. Changes in consumption and investment opportunities are priced in capital markets, hence stock price changes are related to innovations in economic variables (Goswami and Jung 1997). There exists a long-term relationship between the changes in stock prices (and returns) and the macroeconomic variables. Fama (1981, 1990) and Chen et al. (1986) tested the relationships with the US economic data. Fama (1981) documents a strong positive correlation between common stock returns and real economic variables like capital expenditures, industrial production, real GNP, money supply, lagged inflation and interest rates. Chen et al. (1986), found that changes in aggregate production, inflation, short-term interest rates, the maturity risk premium and default risk premium are the relevant economic factors.

Numerous empirical studies have appeared in recent years concerning the impact of broad based macroeconomic variables on on stock market returns (See, for example Hamilton, 1990; Hagerman and Richmond, 1973; Aigbokha, 1995; and Chigue, 2006, Idolor and Erah,2013 to cite only a few). While many of these studies have provided empirical evidence supporting a significant impact of macroeconomic variables on stock markets returns and stock exchanges, there seems to be a few dissenters who have opined that the impact is not significant. Theory has clearly made some progress in the subject. We now understand the importance of the capital market on the economic development of a country, and how it is possibly affected by some broad based macroeconomic variables. However, very little is known about the empirical relevance of stock market returns to a third world or developing country like Nigeria. Empirical work has unearthed some stylized facts on the importance of macroeconomic variables on stock returns, but these evidence is largely based on foreign and highly advanced European and Asian economies; and it is not at all clear how these facts relates to different economic models of other developing and emerging countries like Nigeria.

Without testing the robustness of these findings outside the environment in which they were uncovered, it is hard to determine whether these empirical regularities are merely spurious correlations let alone whether they support one theory or another (Idolor, 2010; Rajan and Zingales, 1995). This paper attempts to start filling this gap in our knowledge. Against this background, the purpose of this study is to wade into this controversy and reinvestigate, using Ordinary Least Square (OLS) regression technique to determine whether inflation, significantly have an impact on the level of Nigerian stock market returns.


This study aims at determining the effect of macroeconomic variables in the Nigerian bourse. Specifically it seeks to proffer solution to the following questions that are critical to the study.

Do changes in inflation affect stock market prices in the Nigerian bourse?

Do changes in the level of inflation affect stock returns in the Nigerian bourse?


The study aims and objectives are focused on determining the impact of macroeconomic variables on the Nigerian bourse. Specifically it seeks to achieve the following objectives:

Ascertain if changes in the level of inflation affect stock prices in the Nigerian bourse.

Ascertain if changes in the level of inflation affect stock returns in the Nigerian bourse.


As a frame of reference, the following hypotheses are posed:

Changes in the level of inflation do not significantly affect stock prices in the Nigerian bourse.

Fluctuations in the level of inflation do not significantly lead to changes in the level of stock market returns in the Nigerian bourse.

These hypotheses serve as the link between theory, speculation and facts. The confirmation or otherwise of these propositions is the subject of the next sections of the study.


There are several compelling needs for undertaking this study. It will update existing body of knowledge by going a step forward to evaluate the awareness and effect of macroeconomic variables on Nigerian stock exchange returns and stock prices in general on the Nigerian bourse. It is therefore expected that the findings of this study will be of immense benefit to policy makers in Nigerian publicly quoted organizations, relevant government institutions, researchers and numerous other stakeholders. As was mentioned earlier, very few empirical studies have been conducted in Nigeria to find out specifically how inflation (in isolation from other macroeconomic variables) affects stock market returns in general .

To the policy makers, the study will point out the next direction in which economic reform should focus upon in other to position and direct Nigerian capital market towards the right path of effectiveness and efficiency especially in the area of resource utilization as well as depth and breadth of the market. The relevant government institutions will find the study beneficial in the sense that it will enhance their understanding of the workings of the Nigerian capital market.

Other relevant stakeholders like shareholders, members of the Boards of Directors who formulate policies, managers and junior staff who implement the policies formulated by top management, fund providers (who would want their monies paid to them when their bills falls due); and customers of publicly quoted firms (and potential public firms as well) who desire an efficient, stable and virile stock market and economy in general will find the study very beneficial. Besides, the findings of this study will lay foundation for other academia and research students to carry-out further research related to this study. The findings of this study, may also serve as very useful springboard for related studies in Nigeria and some other less developed countries (LDCs) or added experience for some others.


The scope of this study will be limited to Nigerian capital market with special reference to the stock prices of all publicly quoted firms via the Nigerian stock exchange All Share Index. To this end adequate data on inflation and stock prices (and returns) for the period 1985 to 2011 was obtained. The only restriction imposed was that data must have been available for the specified period of time.


The sample size considered in this study is too small and also the sample is non-random and hence, it may be biased, while also possibly excluding other macroeconomic variables that may best be appropriate to help capture the effect of macroeconomic variables on stock market returns and prices. Besides, the fact that we resorted to the use of secondary data implies that we are faced with the biases and imperfections that plague the use of secondary data worldwide.


This study is organized into five chapters as follows: chapter one provides the background of the study, stating its objectives, hypothesis, the scope of the study, and the limitation of the study. A review of relevant literature was carried out in chapter two. The focus of chapter three is the research methodology with emphasis on model specification, estimation techniques, data collection and data requirement. Chapter four is concerned with data analysis as well as the various data presentation techniques to be used. The summary and conclusions from the study, recommendations offered and suggestions for further studies is covered in chapter five.



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