Regressing Consumer Price Index on selected Financial Market Indicators in Nigeria

Abstract

The post-2008 fear of the financial meltdown seems to have reduced the interest of investors in financial investments such as treasury bills, Government bonds and Development stock. Was there a relationship between these indicators and inflation in Nigeria? Using a times series data from 1987-2010, a multiple regression model was adapted (with some adjustments in consideration to the Nigerian Situation) from the model of Norliza, Malaysia. The Augmented Dickey Fuller Unit root diagnostic test (ADF) was used to test for Stationarity.  Government bond rate was stationary (p = 0.0000) at level. Development stock was stationary (p = 0.0343) at 5% first difference. Treasury bill rate time series data however was stationary (p = 0.0064) at first difference. Commercial papers rate was stationary (p = 0.0002) at level, The data for annual inflation rate in Nigeria was not stationary up to 4^th difference, hence it was removed from the model and replaced with Consumer Price Index (CPI)  which was stationary at 5% level (p = 0.0357). The coefficients of the explanatory variables were -0.0600, -0.047, -1.073,  -0.045 and  -0.005, for commercial papers rates,  Interest rates, government bond rates, Development stocks and Treasury bills rates, respectively. Consequently, the empirical regression function indicated that all the explanatory variables were negative to the CPI. This implies that when an incremental change occurs in any of the explanatory variables, CPI will fall. The necessity was the relevance of sustaining investment interest in the indicators, which called for Investment Interest Sustenance Program (IISP) and/or Investment Holding Trap (IHT).

Key words: Consumer Price Index, financial market indicators, Inflation rate, Development stock and rates of returns.

JEL Classification: C25, E44, G13, E43