SHARE PRICES AND MACROECONOMIC FACTORS: A TEST OF THE ARBITRAGE PRICING THEORY (APT) IN THE NIGERIAN STOCK MARKET

Abstract

The broad objective of the study is to examine the suitability of the APT in explaining stock returns in Nigeria. Specifically, the study examines the significance of money supply, exchange rate, inflation and oil prices in explaining stock returns in the Nigerian stock market. The study adopts a time-series research design  while Secondary data in quarterly estimates for All share index, oil prices, money supply, Gross Domestic Product, Exchange rate, inflation and interest rate for the period 2000Q1- 2010Q4 were used for the analysis. The method of data estimation is the co-integration and error correction methodology (ECM). The findings reveal that money supply (M2) appeared to be negative and also a significant determinant of stock returns both in the long run and the short run dynamic model for both one period and two period lags at 5% and 10% significance levels. Exchange rate was also observed to be negatively related to stock returns in both the long run and the short run dynamic model for both one period lag and two period lags. However, the result appeared to be insignificant at 5% and 10% significance levels. Interest rate was also observed to be negatively related to stock returns in both the long run and the short run dynamic model for both one period lag and two period lags. The slope coefficient appeared to be insignificant at 5% and 10% significance levels at both the long run and short run. Oil prices was also observed to be negatively related to stock returns in both the long run and the short run dynamic model for both one and two period lags respectively. The slope coefficient also appeared to be significant at 5% and 10% significance levels at both the long and short run while the error correction coefficient is rightly signed. The conclusion is that though the APT macroeconomic variables can explain stock returns, not all the variables are significant both in the long run and in the short run. The recommendation is that there is the need for sensible coordination of macroeconomic policies in Nigeria.

Key words: arbitrage pricing theory, macroeconomic variables, Nigerian stock market