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.