Inflation, Interest Rate, Real Gross Domestic Product and Stock Prices on the Nigerian Stock Exchange: A Post SAP Impact Analysis

Abstract

This study investigated the impact of Inflation, Interest rate and Real Gross Domestic Product on stock prices of quoted companies on the Nigerian Stock Exchange (NSE) post SAP. Times series data was used covering the period 1985-2012. The stationary properties of the data were tested using Augmented Dickey-Fuller (ADF) and Phillips Perron (PP) unit root tests. They were all integrated at order I (1). The Johansen Multivariate Cointegration test indicates the existence of long-run equilibrium relationship among the variables in the model. There are no causal relationships between the variables based on the Granger Causality test result. Our equation estimation result indicates a good fit for the model. 96.8% of variations in the dependent variable were as a result of changes in the independent variables. The Durbin-Watson of 1.867475 is a little below the benchmark of 2 but we don’t have to worry about serial correlation problem. Two other diagnostic tests the Breusch-Pagan-Godfrey test for heteroscedasticity and Ramsey RESET test for stability and both indicate we don’t have to worry about those problems. Specifically, the findings suggest that inflation was the most important variable influencing stock prices in Nigeria. Therefore, it is the opinion of this paper that stronger measures be adopted to effectively combat the problem of inflation in Nigeria.

Key Words: Heteroscedasticity, Stability, interest rate, Cointegration, Causality, Inflation