The Impact of Inflation on Stock Market Performance at the Nigerian Stock Exchange 1986-2006.


The study examined specifically the impact of inflation on stock market performance at the Nigerian Stock Exchange. The study used time series data for 21 year period; 1986-2006, to fill this important research gap. The least square regression approach was used to estimate the necessary models.

The regression results showed that coefficient of inflation rate does not have significant negative impact in explaining the long run performance of the stock market performance indicators tested.

The result as well showed that the coefficient of inflation rate was negative, implying that, though theoretically inflation did not have significant negative impact on stock market performance indicators on the surface, but intrinsically considering the time value of money, inflation actually depreciated the real worth of the market indicators.

In view of the above the following recommendations were made towards measures that can be used by the government for achievement of low and predictable inflation in Nigeria.

The measures are as follows: Adoption of balanced budget by the government; Import substitution and encouragement of domestic production;

Enhancement of food production through extension of credit facilities to agricultural sector as well as construction of silos for storage of excess produce in order to avoid hoarding or scarcity of food items; Prevention of sharp practices through sound management of the exchange rate of the naira;

Implementation of measures to mope up excess liquidity in the system that result from upward review of workers salary;

Earnest pursuance of stable macro-economic environment devoid of political turbulence and instability; Granting of total autonomy to the Central Bank in the formulation and implementation of monetary policies; and encouragement of massive industrialization for improved industrial output in order to facilitate appreciation of the naira in the international market.


Certification —–iii
Approval Page -iv
Dedication —-v
Acknowledgement –vi
Abstract —–vii


1.1 Background of the Study —1
1.2 Statement of Research Problem —4
1.3 Objectives of the Study –5
1.4 Research Questions —-5
1.5 Research Hypotheses —–6
1.6 Significance of the study —–6
1.7 Scope of the study ————7
1.8 Limitations of the Study —-7
1.9 Operational Definition of Terms—8
1.10 References —-9


2.0 Review of Related Literature ——-14
2.1 Inflation: An Overview —14
2.2 Theories on Inflation —–16
2.2.1 The Monetarist —16
2.2.2 The Keynesians —-17
2.2.3 The Neo-Keynesians —-17
2.3 Causes of Inflation ——18
2.3.1 The Philip Curve–19
2.4 Review of Inflation in Industrialized, Emerging Market and Developing Economy —20
2.5 Facts about Inflation in Nigeria —-24
2.5.1 Component and Structure of Consumer Price Index [CPI] —-24
2.6 Evolution of the Capital Market in Nigeria —26
2.6.1 The Structure and Organization of the Nigerian Capital Market — 28
2.6.2 Functions of the Nigerian Capital Market ———28
2.6.3 Capital Market Dynamic in Nigeria —–29
2.6.4 The Problems and Prospect of the Nigerian Capital Market ——–30
2.6.5 Regulatory and Institutional Framework for the Nigerian Capital Market —31
2. 6.5.1 Securities and Exchange Commission [SEC] ——31 Objectives of Securities and Exchange Commission [SEC] ——-33 Function of the Commission ——–34
2.7 Stock Exchanges: An Overview ———37
2.7.1 Histories of Stock Exchanges —-37
2.7.2 The Role of Stock Exchanges ——-38
2.7.3 Ownership of Stock Exchanges —-40
2.7.4 Other Types of Stock Exchanges ———–40
2.7.5 The Nigerian Stock Exchange [NSE] —-41
2.7.6 The Abuja Securities and Commodities Exchange [ASCE] ——-43
2.8 The Investment and Securities Tribunal [IST] —–43
2.9 The Issuing Houses ———44
2.10 The Stock-broking Firm —–44
2.11 The Registrar ——44
2.12 Other Legislation Affecting Capital Market Development in Nigeria —–45
2.13 Market Infrastructure and Development in Innovations —-46
2.13.1 The Automated Trading System ——-46
2.13.2 The Central Securities Clearing System [CSCS) —–46
2.13.3 On-Line Trading —47
2.13.4 Remote Trading ——-47
2.12.5 The Trade Alert —–47
2.13.6 Code of Corporate Governance for Public Companies —-48
2.13.7 Administrative Proceedings Committee [APC] of SEC – —-48
2.13.8 Code of Conduct for Capital Market Operators ——–48
2.13.9 Debt Securitization and Debt Conversion —–48
2.13.10 International Co-operation with other Regulatory Bodies—–49
2.14 Performance of the Capital Market —-49
2.15 Capital Market Infrastructure ———56
2.15.1 Products of the Capital Market ————–57
2.15.2 Market Dynamics Innovations ——58
2.15.3 Risks in the Capital Market ——-59
2.16 Review of Some Empirical Studies on the Capital Market —-60
2.17 Review of Some Empirical Studies on the Impact of Inflation on Stock Market Performance Indicators -63
2.18 References ——66


3.1 Research Design ————72
3.2 The Nature and Sources of Data —–72
3.3 Population and Sample Size —–73
3.4 Description of Research Variables —73
3.4.1 Independent Variables —-73
3.4.2 The Rates of Inflation —–73
3.4.3 Dependent Variables ——-74 Value of Stock ——74 Market Turnover ———74 Volume of Trade —74 Market Capitalization ——74 Stoichastic Disturbances -74
3.5 Technique for Analyses ——74
3.6 Model Specification —–75
3.7 Test of Robustness —-76
3.8 References —–77


4.1 Data Presentation——–79
4.2 Data Analysis ——83
4.3 Test of Hypotheses —-86
4.3.1 Test of Hypothesis One —-87
4.3.2 Test of Hypothesis Two ——88
4.3.3 Test of Hypothesis Three —-89
4.3.4 Test of Hypothesis Four —–90
4.4 Validity Test —–91
4.4.1 Validity Result for Hypothesis Test One ——91
4.4.2 Validity Result of Hypothesis Test Two —-91
4.4.3 Validity Result of Hypothesis Test Three ——91
4.4.4 Validity Result of Hypothesis Test Four —-92
4.5.0 Test, For Robustness —–92
4.6 References ————94


5.0 Summary of Findings, Conclusion and Recommendations –95
5.1 Summary of research Findings —-95
5.2 Conclusion ——–95
5.3 Recommendations ——–96
5.4 Recommended Areas for Further Studies –98
5.5 Major Contribution to Knowledge ——-98


1.1 Background to the Study

Inflation as a concept is intrinsically linked to money as captured by the often heard maxim ” inflation is too much money chasing after few goods”.

Inflation also has been widely described as an economic situation where the increase in money supply is “faster” than the new production of goods and services in the same economy [Hamilton 2001].

Usually economists try to distinguish inflation from an economic phenomenon of a one time increase in prices or when there are price increases in a narrow group of economic goods or services [Piana 2001].

Thus the term inflation describes a general and persistent increase in the prices of goods and services in an economy [Ojo 2000, Melberg 1992].

High rate of inflation is a problem that has faced the Nigerian economy for over a long period. The country registered low rates of inflation in the years immediately after independence.

Available information indicates that the country experienced a double digit rate of inflation in 1970; this was attributed to the outcome of the civil war. Other periods of high inflation were 1974-1979, when the wage freeze was discontinued, as was recommended by the Udoji salary review commission of 1974.

The rate of inflation rose to 20.9% in 1981; 23.2% in 1983; 39.6% in 1984; 10.2% in 1987; 38.3% in 1988 and 40.9% in 1989. In 1990, inflation rate reduced to a single digit, only to rise again at a tremendous pace from 1991-1994, climaxing to 72.6% in 1995.

But from 1996, remarkable reductions were witnessed; but double digit was still recorded, except in 2006 that recorded 8.2% [National Bureau of Statistic 2007]. Rates of inflation further reduced to 5.4% in 2007 but rose to 11.5%, 13.9%, 10.8%, and 12.7% from 2008-2012 respectively.


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Aron, J. and Muellbauer, J. [2000], “Inflation, and Output Forecasting, for South Africa Monetary Transmission Implication”, Center for the Study of African Economies, CSAE Working Paper Series 2004-07, March.

Asogu, J. O.[1991], An Econometric Analysis of the Nature and Causes of Inflation in Nigeria”, Central Bank of Nigeria Economic and Financial Review, vol.29, No.3, pp. 489-496.

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Bailliu, J. et al [2002], Explaining and Forecasting Inflation in Emerging Markets”, the Bank of Canada and the Banco de Mexico, October.

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