Empirical Analysis of the Relationship between Stock Market Returns and Macroeconomic Indicators in Nigeria

Abstract

The objective of this paper is to investigate the relationship between stock market returns and macroeconomic indicators (exchange rates, money supply and M2, credit to the private sectors, and net foreign assets) in Nigeria. Monthly data ranging from January 2000 to March 2013 were analysed for evidence of long-run and short-run relationship. Results of Augmented Dickey Fuller Unit root test show that all the variables are integrated of order one (I(1)). Results of the Engle and Granger Cointegration test evidence of long-run relationship between stock market returns and all the macroeconomic variables examined. Results of the Error correction model indicate evidence of negative relation between exchange rate and stock market returns as well as a positive relation between credit to private sector and stock market returns in the short-run. The implication is for investors and regulators in the stock market to monitor changes in the macroeconomic indicator and adjust their portfolios accordingly.

Keywords: Stock Market Returns, Macroeconomic Indicators, Nigeria.

JEL Classification Code: G14, E44.