Economic Fundamentals and Changes in Stock Prices: A Comparative Analysis of Nigerian and South African Stock Exchange

Abstract

This study addressed the question of whether economic variables have explanatory power over changes in stock prices in the Nigerian Stock Exchange (NSE) and Johannesburg Stock Exchange (JSE) on the reasoning that the two country’s stock markets are the biggest in Africa in terms of basic market indicators. The research assessed the impacts of economic fundamentals and terrorism incidents on changes in stock prices between both NSE and JSE using quarterly time series data spanning from January 1984:1 to December 2010:4 periods and applying recent econometric technique called Vector Auto-Regressions (VAR) model. We found that there is a significant relationship between changes in stock prices and economic fundamentals in both economies under review. The empirical evidence unveiled that in both economies at previous quarters, changes in interest rate differential, inflation, money supply and exchange rate do not really affect the movement of stock prices. Stock prices in current quarters and oil prices at previous quarters respond positively and in a very significant way to changes in current stock prices in Nigeria and South Africa. Oil prices are significant determinants of changes in current stock prices in South African, whereas in Nigerian stock market, only oil prices at previous quarters matter so much in determining changes in current stock prices. Our results also indicated that index of industrial production matters very much in Nigerian stock market, whereas it does not matter that much in South Africa. Stock price at previous quarters is not a major determinant of the current value of any of the economic fundamentals in South African economy. In Nigeria, stock price at previous quarters is a major determinant of the current value of all the economic fundamentals except interest rate differential and money supply. Our findings further showed that the presence of terrorism increases the possibility of increase in stock prices at current quarter in South Africa with insignificant effect but this is not so with Nigeria. It was only in Nigeria that the presence of terrorism at second past quarter significantly affects changes in stock price at current quarter.