ABSTRACT
In Nigeria, stock market is a financial institution (or market) that ensures growth and healthy financial system by promoting efficiency in capital formation and allocation from surplus to deficit areas of the economy, while crude oil is the life-blood that serves as the feedstock or energy resource for the economic prosperity and wealth as the economy undergo industrial development. Therefore, this project seeks to investigate whether or not oil price changes has an impact on stock market development in Nigeria. The population for this research is all the stocks traded on the floor of Nigerian stock exchange market from 1986 to 2016. The dependent variables employed in this research were Value of Share Traded, and All Share Index, while the independent variables were Oil price, Exchange rate, Inflation, and Change in oil price. Data collected were computed accordingly with the aid of E-views software for data analysis. Descriptive as well as regression analysis were used for data interpretation. Findings revealed that oil price had positive and significant impact on stock market development in Nigeria. Recommendations were made that stock prices should reflect and incorporate all fundamental information on the nature of the economic variables, and policy makers should monitor the movement of crude oil price in order to ensure growth and healthy financial system in the economy.CHAPTER ONE
INTRODUCTION
1.1 Background of the study
Nigeria as the most popular black nation situated in West Africa, is widely known for her dominant source of revenue “Crude oil”. From the middle of twentieth century till date, crude oil has become one of the main indicators of economic activities worldwide due to it great importance in the supply of world’s energy demands. Therefore, Nigeria become one of the major suppliers of crude oil in the international market in which it also depends so much in the oil price in making her annual budgets.
Nigeria is experiencing changes in its price per barrel and production. Evidence showed that oil price per barrel rose from US$25 in 2002 to US$55 in 2005, and a shocking-increase of US$147 in mid-2008 and sharply declined to US$46 (Akpan, 2009). Crude oil still rose again to US$96 in 2014 and declined to US$49 in 2015 and US$40 in 2016, and rose again to US$52 in 2017. It is therefore worthy to note that persistent oil shocks such as this may have great impact on the economic activities of both oil exporting and importing countries.
The impact of rise in oil price on the exporting countries which Nigeria belongs, could be positive based on the fact that it would increase the revenue for oil exporting economies. Although, reduction in quantity demanded by the oil importing countries as a result of rise in oil price, may weaken the total revenue expected to be earned from crude oil exports, and this goes in line with the laws of demand which stated that an increase in the price of a product would leads to a decrease in quantity demanded of such product and vice-versa. This implies that oil price increase tends to impact negatively on oil importing countries because the energy cost for many companies in the importing economies would increase assuming that the companies do not hedge the oil price uncertainty, and if change in oil price triggers inflation, the cost of production (material cost, labor cost, and overheads) would increase for most of the companies that uses oil as input.
With oil revenue as the main stay of the Nigerian economy, changes in oil price should definitely be of prime interest to financiers as well as economists in order to predict the impact of shocks (increase or decrease) in oil price on the Nigerian economy. This is because fluctuation in the price of crude oil could have it implications on the various economic activities of the nation.
In Nigerian economy, Stock market as financial institution (or market) is one of the components or part of the national economy that ensures growth and healthy financial system by promoting efficiency in capital formation and allocation from surplus to deficit areas of the economy. Jones, Leiby and Pail (2004) also postulated that stock market in any given economy is an information collection and processing financial institution, and the asset prices it establishes depends much on the information about future expectation as well as the current conditions facing the quoted firms.
Therefore, the determination of the overall growth of an economy depends on how efficiently the stock market performs its allocative function of capital. In the stock market, stock prices are said to reflect and incorporate all fundamental information on the nature of the economic variables. When this occur, it implies that the stock market is efficient. Therefore, the transmission of shocks to the stock prices should be reflected through changes in all or some of the fundamental information about the current conditions of the quoted firms such as the future productive capability, earning capability, quality of management, etc. In the same vein, it is reasonable to say that information about changes in oil price should also be incorporated into the values or prices of stocks thereby impacting either positively or negatively on stock market performance and as well the economic development. So, the impact of oil price changes on stock market development becomes an interesting and important issue to be explored, even more recently when the world oil price displayed a great instability that even the general public has expressed great concern about the oil price fluctuation which becomes one of the current affairs published on the front pages by majority of the world’s newspapers (especially in US). Thus, the prevailing views among economists are that there could be strong relationship between the growth rate of a country and oil price changes.
1.2 Statement of the problem
This study is carried out based on the fact that Nigerian economy over the last two decades has been depending on the oil proceeds as her major source of revenue. It has also been identified that the unpredictable changes in oil price have significant implications on various economic activities. This views has been well clarified by the works of various authors including those of Rasche and Tatom (1981), Hamilton (1983, 1985, 1996, and 2003), Burbidge and Harrison (1984), Santini (1985), Gisserand Godwin (1986), Loughani (1986), Tatom (1988), Mork (1989), Hamilton and Herrera (2004) and many others, who have convincingly argued that change in oil prices were significant determinants of U.S economic activities as well as the origin to it post-war period.
Format: MS-Word
Pages: 47 Pages
Chapters: 1-5 (Complete)
Steps
