Dynamic Effects of Capital Flow Shocks upon Stock Market Developments in Nigeria

Abstract

Aims: To analyze the dependent relationship between capital flow and stock market development in Nigeria. Study Design: case study (Nigeria) Methodology: the study employed the use of Vector Auto-regression Model (Granger – Causality Wald Test, Impulse Response Test and Variance Decomposition Test), to enable us achieve our objectives. Scope of the Study: 1986 – 2012. Results: the granger causality result shows that Capital Account Balance (Deju), Foreign direct investment (FDIN), Net portfolio investment (NPI), Real gross domestic product (RGDP), Exchange Rate (EXCR), does not granger cause Market Capitalization (MC). There is bi-causality relationship between Market Capitalization and Trade Openness, that is, both Market Capitalization (MC) and Trade Openness(TROP) granger cause each other. Also, A uni-directional causality exist between Debt (DEBT) and Market Capitalization. Debt granger causes Market Capitalization but Market Capitalization does not granger cause Debt.  For Impulse Response result indicates that Market Capitalization responded positively all through the year to the shock in Trade Openness, Real gross domestic product and Exchange Rate. While shocks in Dejure, NPI, and FDIN appears insignificant to Variations in Market Capitalization. Finally, the Variance decomposition analysis reveals that Market Capitalization contributes 40 percent of its own shock all through the year while the other variables accounts for the other 60 percent. Among all the selected variables, Trade Openness and Real gross domestic product seem to account for 45 percent of variation in Market Capitalization for the period under study. Conclusion: based on our findings, market capitalization responded strongly to variations in trade openness and real gross domestic product. While shocks/changes in Deju, Net portfolio investment, Foreign direct investment and Debt appears insignificant to Variations in Market Capitalization. Showing that in all capital flow (liberalization) have not impacted on stock market development in Nigeria during the period under review.