Oil Price Volatility and the All-share Index: Evidence from Nigeria
Abstract
Oil price is one of the most important economic factors directing the world economy. This is even more pronounced for the Nigerian economy that relies heavily on crude oil export revenues. A change in oil price is expected to impact on all her economic frontiers. Thus, the aim of this study is to investigate the effect of global oil price changes on All share index of the Nigerian Stock exchange. Relevant data for the estimation were obtained from Central Bank of Nigeria’s data base ranging from the period January, 2006 to December,2015, making for an equal 120 observations. The end of month values of the All-share index , which is value weighted constitutes all trading securities on the stock market, These were related with the prevailing price of oil at the global market for the corresponding periods. A combination of preliminary analysis, short run and long run models were generated in this investigation. The paper established that, while the trace and max Eigen value tests indicates a case of no co-integration, the causality test reveals that none of the variables granger cause each other. The impulse–response function indicates that , on the average, All Share Index was feeding on itself . Variance Decomposition analysis shows that at a 10 year horizon, 97.36% of the variance in All Share Index are explained by their own shocks. While the VAR estimates suggest that All share index responds to fluctuations in the global pricing of oil overtime; the ARCH model of order 1 indicates the presence of volatility clustering on the All share Index. On the other hand, coefficients of ARCH , GARCH and ASSYMETRIC GARCH terms did not satisfy the decision rules but probability of the GARCH in Mean Term did, suggesting that oil price volatility affects returns on All share index of the Nigeria stock exchange at 1% Alpha level. Based on the findings of study, we conclude that investors purposing to invest in the Nigerian stock market should do so with some bit of caution seeing that outcome of some of the tests were at variance with each other. They did not all provide, a satisfactory and predictive information on the trading position of the Nigerian All share index. This simply infers that, to some extent, the global price of oil should be taken cognizance of while predicting the price of stocks in the Nigerian stock market. It is expedient we state here that, the efficiency of capital markets are measured by the ability of securities to reflect and incorporate all relevant information almost instantaneously , in their prices. In other words, how responsive the Nigerian Stock market is to information, will determine the rate at which volatility in the global pricing of crude oil will affect the pricing of stock and by extension value of the All share index. Capital markets have been found to be fairly efficient in the advanced economies as well as in a number of emerging capital markets. We therefore recommend that the Nigerian Securities and Exchange Commission, should strive to make the Nigerian capital market as efficient as possible Keywords: Nigerian Stock Market , All-share Index, Efficient market, Crude oil price, Oil price volatility.
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ISSN (Paper)2222-1697 ISSN (Online)2222-2847
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