An Analysis of the Interrelationship and Impact of Stockmarket, Micro and Macroeconomic Fundamentals on Stockpricing in Nigeria

Abstract

Since the Dutch Tulip Mania of the 1630s, cycles of bubbles and bursts in stock markets have become commonplace across the world, hence, this has gained a reasonable academic attention. However answers as to what causes a particular market crash remains context-specific and in most cases, weakly related to the overall question of what causes stock market crash and how it can be prevented. Consequently, the question of what causes a particular market crash remains context specific which has to be answered for all dips in the stock market. Recently, Nigeria Capital Market took a plunge downwards in March 2008 after more than four years of consistent super performance. As is the case in many other African countries, thus far, explanations are hardly empirics supported. As a result, specific drivers of the markets given the peculiarities of poor capitalization, weak underlying economic base and open capital accounts remain unexamined. This study employs three approaches with two data sources - with two data sources – one primary (analyzed using charts and tables as well as estimates from a censored logit model) and the other secondary (analyzed using error correction model incorporating macroeconomic indicators) to examine the relationship between Nigeria Stock market and economic fundamentals with a view to determining their impact on stock valuation. We estimated two equations. The first equation showed the relationship of a long run all share price index with major indicators in the economy and the second showed a relationship of the actual value of the all share price index with same set (augmented set) of indicators. The results from the two data sources significantly corroborated each other. The findings largely indicate disconnect between economic fundamentals and stock pricing. We explored the implications on the economy and proffered solutions.