Macroeconomic Variables and the Returns on Stock Prices: Empirical Evidence from Nigeria

Abstract

In spite of the vital roles performed by the stock exchange market for the overall national development, it is still performing below expectations in Nigeria owing to several macroeconomic factors. Accordingly, the main objective of this study is to investigate the effects of selected macroeconomic variables on returns of stock prices in Nigeria. The study employed time series data obtained from the Central Bank of Nigeria statistical bulletin and World Development Indicators. Returns of stock price was measured using all-share index while the identified macroeconomic variables include GDP growth, broad money supply, exchange rate, interest rate and inflation rate. Autoregressive Distributive Lag (ARDL) estimation technique was used to establish the long run relationship among the variables and it was revealed that long run relationship exists among the variables in the estimated model. The result of the Error Correction Mechanism (ECM) within the framework of the ARDL shows that macroeconomic variables such as gross domestic product, broad money supply, exchange rate and interest rate have positive effect on returns of stock prices in Nigeria. On the other hand, the results showed that inflation rate has negative effect on stock prices in Nigeria. Predicated on the result, the study recommended that policies to increase gross domestic product, exchange rate, interest rate and money supply should be implemented because they can lead to improvement in the returns of stock prices, while inflation rate should be maintained at single digit to prevent its negative effect on the performance of the stock market in Nigeria.