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CHAPTER ONE

Introduction

The Nigeria stock market is a key determinant of the Nigeria financial system. The Nigeria

stock market generate the essential equipment for companies and government to create fund for

business development and expansion of projects through individual’s who own shares in

organizations for the ultimate economic welfare of all members of the society Willem, (2001). At

the centre of any developed economy there is often a well organized and developed financial

system, a good financial system helps to increase the standard of living and the society’s well-

being, by creating an efficient system of allocation of available resources funds to enhance

production of goods and services. The financial market provides opportunity where the savers

and the investors meet in an open market, the accumulated aggregate savings are moved into

viable and most desirable investment for the growth and development of an economy Levine,

(1991) and Starr, (1996).

The central focus of economist has been mobilization of resources for national growth and

development. The stock market is an economic institution, which promotes efficiency in capital

formation and allocation Nyong and Emenga, (1997).

The stock market helps governments and industries to raise long- term capital to enhance funding

of new projects, and expanding and modernizing industrial/commercial concerns. The rate of the

economy often suffers if capital resources are not given to those economic areas, especially

industries where demand is always at an increasing rate and which are capable of improving

productivity and increasing production and market for goods and services Remi, (2001).

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One of the most important benefit of the stock market to corporate entities is the provision of

long-term, non-debt financial capital. By issuing equity securities, company’s acquire long-term

capital for development and the market also enables companies to avoid over reliance on debt

financing, thus improving corporate debt-to-equity ratio Walter, (1873).

1.1 Background of The Study

The Nigeria stock exchange was established in1960 as the Lagos stock exchange. it became The

Nigerian stock exchange in 1977, the transition from Lagos stock exchange to Nigerian stock

exchange was because of dissatisfaction that people expressed about the financial system of the

capital market among other reasons, with branches established in some of the major commercial

cities of the country such as Abuja, Kano, port Harcourt, Onitsha, Ibadan, yola and Kaduna with

Lagos as the head office of the Nigerian exchange and an office in Abuja. In 1961 the exchange

started operations with 19 securities listed for trading. presently there are 262 securities listed on

the exchange, made up of 11 government stocks, 49 industrial loan (debenture/preference) stocks

and 194 equity/ordinary shares of companies, all with a total market capitalization stood at

N287.0 billion, as at august 31, 1999. Presently, there are 139 listed equities while the all share

index and market capitalization stood at 24,807 basis points and 1.973 trillion respectively as at

December 3, 2010, in 2011 net flows (debt and equity) stood at US$60.8billion, in 2012

US$70.7billion, 2013 US$72.2billion, 2014 US$75.5billion, 2015 US$81.5billion. Nigerian

stock exchange equities summary. Most of the listed companies have foreign/ multinational

affiliations and represent a cross-section of the economy, ranging from agriculture through

manufacturing to services.

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The stock market is an economic institution, which encourage efficiency in capital formation and

allocation. The stock market helps industry and government to increase long- term capital for

expanding and financing new projects, and modernizing industrial/ commercial concerns. If

capital resources are not made available to those economic areas, especially industries where

demand is increasing and which are able of increase production and productivity, the rate of

expansion of the economy usually suffers. A peculiar benefit of the stock market to corporate

entities is the provision of long-term, non-debt financial capital. Through the issuance of equities

securities, companies acquire perpetual capital for development. Through the provision of equity

capital, the market also enables companies to avoid over-reliance on debt financing, thus

improving corporation debt-to-equity ratio.

In recent time, there was a growing concerned on the role of stock exchange market in economic

growth. The stock market is in its focus of the perceived benefits it provides for the economy.

The existing literature clearly state that developed economies had examined the two channels

through which resource mobilization affects economic growth and development of money and

capital markets Samuel (1996); Demirguc-kunt and Levine (1996). This is however, not in the

case in developing economies where emphasis was placed on money market with little or no

consideration for capital market Nyong, (1997).

Since the introduction of Structural Adjustment Programme (SAP) in Nigeria, the country’s

stock market has grown very significantly Alile, (1996); Soyode, (1990). This is as a result of

deregulation of the financial sector and the privatization exercises, which exposed investors and

companies to importance of the stock market. Equity financing became one of the cheapest and

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flexible sources of finance from the capital market and remains a critical element in the

sustainable development of the economy Okereke-Onyiuke( 2000).

Though stock market is growing, it is however characterized by complexities. The complications

arise from trends in globalization and increased variety of new instruments being traded: equity

options, derivatives of various forms, index futures etc. however, the main objectives of the stock

exchanges worldwide remains the maintenance of an efficient market with attendant benefit of

economic growth Alile,(1997).

The connection between the stock market performance and economic growth has often generated

strong debate among analysts based on their study of developed and emerging markets Samuel,

(1996); Demirguc-Kunt and Levine, (1996); Akinifesi, 1987; Levine and Zervos, 1996; Obadan,

1998; Onosode, (1998); Emenuga, 1998; Osinubi, (1998). According to Nyong (1997) the

financial structure of a firm, i.e. the mix of debt and equity financing, changes as economies

develop.

Though before the establishment of stock market in Nigeria, there existed some less formal

market arrangements for the operation of capital market. It was not projecting until the visit of

Lobynesion in 1959; he was invited by the federal government, to advice on the role the central

bank could play in the development of local money and capital market. As to meet up with this

the government commissioned and set up a committee (the barrack committee) to study and

make recommendations on the ways and means of establishing a stock market in Nigeria as a

formal capital market. Acting on the recommendation of the committee, the Lagos stock market

as it was then called was set-up in march 1960, and in September 1961, it was incorporated

under the section 2 cap 37, through the effort of the central bank of Nigeria , the business

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community and industrial development bank Alile &Anao,( 1990). With the establishment of the

central bank of Nigeria in 1959, on December 2nd 1977, the memorandum and article of

association creating the Lagos stock exchange was transformed into the Nigeria stock exchange,

with branches in Lagos, Kaduna, port-Harcourt, Yola, Kano and now in federal capital territory

(FCT) Abuja alone side other cities. The history of Nigeria capital market could be traced to

1949 when the British colonial administration floated a N600, 000 lock loan stock bearing

interest at 31/4% for financing of development projects under ten years plan local ordinance. The

loan stock, which had a maturity of 10-15 years, was oversubscribed by more than N1million;

yet local participation of the issued was terribly poor. Certainly, potential fund abound in

Nigeria.

From the above background, this study is to investigate the impact of stock market on the

economic growth and development of Nigeria. The concept of savings and investment is equally

stressed by different authors in different literature see Rowstow (1960), Soyode (1990),

Algbokan (1995), and Sani (1996). Since sustainable economic growth and development largely

depends on the rate of departmental funds, the efficiency of the organization therefore depends

on the amount of resources mobilized and invested to enable businesses and the economy

harness their human, material, and management resources for optimal output.

1.2 Statement of The Problem

There is enough evidence that most Nigerian businesses lack long-term capital. The business

sector has depended mainly on short-term financing such as overdrafts to finance even long-term

capital. Based on the maturity matching concept, such financing is risky. All such firms need to

raise a suitable mix for short- and long-term capital Demirguc-Kunt & Levine, (1996).

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Recent literatures on the Nigeria stock market like Chinwuba and Amos (2011) pointed out that

the Nigeria stock exchange is one of the major institutions that acts in propelling a prostrate

economy for growth and development have recognized the great performance the market has

recorded in recent times. However, the important role of the stock market in economic growth

and development which has been empirically examined though not with same duration as of this

research (1985-2017) which may likely influences the result for this reason a research gap is

been created in this area. This research work is carried out to investigate the importance of the

stock market to Nigeria’s economic development and growth. Apart from the institutional and

social factors occupying the process of economic development in Nigeria, the delay caused by

the scarcity of finance to the economy caused a major limitation to its development. As a result,

it is important to examine the Nigeria stock market.

1.3 Research Questions

Basically on the above stated challenges, the study seeks to find out the questions below

1. Has the improved performance in the capital market contributed towards the economic

growth and development of Nigeria?

2. What is the impact of Nigeria stock market on the real sector of the economy?

3. How is the operation of the Nigeria stock market?

1.4 Objective of The Study

This research work has a broad objective, which has been set out to achieve, these are as follows:

1. To evaluate the performance and the contribution of capital market on economic growth

and development of Nigeria.

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2. To determine the impact of Nigeria stock market on the real sector of the economy.

3. To examine the operation of the Nigeria stock market.

1.5 Research Hypothesis

H0: there is no significant impact of stock market on Nigeria’s economic growth.

H1: there is significant impact on stock market on Nigeria’s economic growth.

1.6 Significance of The Study

This study will explore the impact of stock market instruments on economic growth of Nigeria.

However, recently Nigeria experienced sharp decline in economic activities, high rate of

unemployment, price and low level of production (recession). In respect to this, stock market is

established to provide solutions for the growth and betterment of the economy. There is a

relationship that exists between the stock market growth and the entire growth of the economy

of a nation;

The main significance of this research work is that, it will provide policy recommendations on

ways to promote the activities and operations of the stock market. It is at this end that a research

work of this nature is not only important but also timely and worthwhile.

1.7 Scope And Limitation

The economy is a wide component with a lot of diverse and sometimes large parts; this research

work only looked at a particular part of the economy (the financial sector). More specially, this

study will only focus on the stock market as it impact on the Nigeria economic growth.

Furthermore, the reason why the Nigeria stock market is fast growing with a slow economic

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growth in Nigeria will be empirically investigated by using the time frame of 35years i.e. 1985-

2017

1.8 Organization of Study.

This study is divided into five (5) chapters for the sake of making thorough and

comprehensive research, chapter one contains the introduction of the study, background of

the study, statement of the problem, research questions, objective of the study, statement of

hypothesis, significance of the study, scope and limitation of the study and finally the

organization of the study. Chapter two consists of introduction, conceptual issues, critiques

of Nigeria’s stock market, theoretical framework, theories of stock market and economic

growth, empirical literature. Chapter three consists of introduction, theoretical framework,

unit root test, variable measurement, and model specification and estimation procedure.

Chapter four consists of introduction, presentation of regression result, unit root analysis,

Johansen co integration analysis VECM analysis, LM serial correlation, Heteroskedasticity

test, granger causality test and discussion of the result. Chapter five consists of introduction,

summary of findings, suggestion for other research, conclusion and recommendations based

on research findings

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CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter, will discuss the conceptual issues of stock market, various definitions of stock

market, quoted by various writers, functions of the stock market, the major players in the market

operators, names of security commonly used in the stock market, Prospects for improved

performance of the stock market, measures of stock market development and economic growth

critiques of Nigeria’s stock market, theoretical framework and finally, empirical literature

review.

2.2 Theoretical Framework

Different scholars have formulated theories explaining the impact of stock market on economic

growth; various theories were established for the purpose of explaining the basis of this research

work and to examine the theoretical work, if whether or not they are applicable to the Nigeria

economic growth.

2.2.1 The Harrod- Domar Growth Model,

The principal strategy for accelerating economic growth is mobilization of savings and

generation of investment. Importance or merit of Harrod–Domar model: it explains the

mechanism by which investment leads to growth and investment comes from savings.

The rate of economic growth (GDP growth rate) is determined by the ability of the economy to

save (savings ratio) and the capital output ratio. Y = ∆S/∆K, Where Y is the GDP at growth

factor or growth rate, S is the national savings over time, K is the output of the economy, ∆ is the

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ratio of savings and output. ∆S/∆Y is ratio of investment of the economy over time. Thus,

∆Y/Y= s/k or S=I.

Where S is the savings which equal the investments (I) in the economy. The stock market as an

instruments of fund mobilization (S) as indicated by Harrod-Domar is equal the investment

opportunity of the economy. Thus, through the savings from the stock market help to channel

fund for investments in the economy. Investments as indicated above help to generate

employment and income to the economy which result to an increase in output Singh, (1997)

Also the stock market helps in mobilization of saving and generation of investment for both

government and individuals which improves economic growth. That is, it helps to build and

speedy the growth of the economy.

Just as it was showed, in the study of McKinnon (1973) and Shaw (1973), they based their

analysis on the role played by financial liberalization in increasing saving and likewise

investment. They argued that financial market deepening enhances not only productivity of

capital but also the saving rate and, therefore, investment and growth.

2.3 Literature and Empirical Review.

Usman and Alfa (2013) suggested a more comprehensive and dynamic impact of stock market

on economic growth in Nigeria from 1981 to 2012, using the Augmented Dickey fuller (ADF)

diagnostic test, johanse cointegretion test vector error correction model (VECM) and granger

causality test. The result of the stationary test shows that every series are stationary at first

differential and integrated or order one (1) the result of the Johansen cointegration test shows

that there is a long run relationship, given the trace statistics greater than the critical values at

various rank. However the result of VECM shows a positive relationship between market

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capitalization, market size, real gross domestic product (RGDP) with the causal effect running

from GDP to market capitalization. There is also an existence of short run relationship between

value traded and RGDP with value traded causing RGDP.

Bernard and Austin (2012) pointed out the importance of stock market development on

economic growth in Nigeria, using time series data for the sample period of 1994 to 2008 and the

simple OLS ordinary least square regression analysis. The result shows that stock market

capitalization and value traded have a negative impact on economic growth in Nigeria although

the significance is not statistically significant.

Abu (2009) investigates weather stock market development raises economic growth in Nigeria,

by using the vector error correction model. The econometric results shows that stock market

development raises economic growth.

Kolapo and Adaramola (2012), che (2003) showed that stock market have a Positive impact on

economic growth with stock market granger causing economic growth in Malaysia. Mohammed

et al (2008) discovered a long run relationship between stock market and economic growth. In

the same way, Lia and Hsu (2006) on their work in Taiwan suggested a positive relationship

between stock market and economic growth. On the contrary, Ted (2005) showed a negative

relationship between stock market and economic growth in Indian.

Finally, Autonios (2010) examines the causal relationship between stock market development

and economic growth for the period of 1965-2007 in Germany using vector error correction

model (VECM) and the johansen cointegration analysis based on the classical unit roots tests.

The results of granger causality tests showed that there is a unidirectional causality between

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stock market development and economic growth with direction from stock market development

to economic growth.

2.4 Conceptual literature

Obadan (1998) define stock exchange as a well defined market for buying and selling financial

instruments such as stocks and shares. The exchange supports capital raising process by

providing best quantity, most cost effective market place for the financial instrument.

Ekiran (1999) defined stock exchange as an organized secondary market for buying and selling

of securities. It is a market where securities are listed for the purpose of trading. He portrays the

stock exchange as a market for continuous trading of company’s securities to him.’’ Stock

exchange’’ not because securities can be exchange from one security to another which would

have been trade by barter, but because stock or securities can be exchanged for cash effect. When

an investor part with his security, he receives cash or cheques in return and vice versa.

Ojo (1991) stated that the stock exchange market can be seen as many things at the same time! It

is a place where debt and equity securities of different types are traded openly. It is a market that

facilitates capital mobilization and allocation, as both companies and government can rise

through the offer to shares (by companies) and bond, (by companies and government). The

facility, which the stock exchange market provides for trading existing securities. Removes the

laws that would have limit individuals from investing their savings in securities.

Dauda (2005) expressed that stock exchange is a market where investor can buy and sell

securities and government and companies can raise long term capital.

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Badamasi (2005) looks at it as a self-regulatory organization (SRO) that provides secondary

market facilities and regulates those activities of stock brokers.

Anyanwu (1993) defined the capital market is a mechanism whereby economic units who wishes

to invest their fundscome in contact with financial intermediaries directly to interact and those

who wish to obtain funds for their business.

According to fosback (1991) and raghbendrajha (2003) ‘’new issues comprise a set of stocks

which falls outside the usually evaluation techniques’’. A new issue can be said to be first sale of

stock by a company to the public. When the physical resources of companies have been utilized

to the maximum and they need new capital for expansion and other related purposes. As a

nation’s economy grows and develops, the volume of new issues of securities also increases.

On the other hand, a secondary market for buying and selling existing securities. Fosback (1991)

and Raghbendrajha, (2003) observe that ‘’ the primary intent of sellers in the secondary market is

to discard the block of shares at a price above that which could be obtained if stocks were offered

at piecemeal in the regular auction market’’. In other words, the need for secondary markets

arises when one or several shareholders that have a large block of stock want to convert their

shares into cash or transfer them from one person to another.

2.4.1. The function of stock market in an economy.

The stock market is in the focus of the economist and policy markers because of the perceived

benefit it provides for the economy. According to Obadon (1995), the stock market provides

support for capital market activities and it is often cited as a barometer of business direction.

Anyanwu (1993) stated and identified the following functions of the Nigerian stock exchange

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1. to increase participation in the private sector of the economy by the public

2. to create opportunities for continued operation and attracted of foreign capital investment

for the development of the nation

3. to provide appropriate machinery top facilitate further offerings of stock and shares to the

general public.

4. As soon as the stocks and shares are readily available the stock exchanges encourages

investment

5. To reduce the risk of liquidity by facilitating the purchase and sale of securities.

6. To protect the public from shady deals and practices in quoted securities so as to ensure

fair trading through its rules, regulation and operational code.

7. To provide a central meeting place for members to buy and sell existing stocks and shares

and for granting quotations of new ones

8. To facilitate dealings in government activities and hence enhance foreign investment in

Nigerian manufacturing since government goes into joint venture with foreign investors

9. Provide opportunities for raising new capital

10. To provide the machinery for mobilizing private and public savings and making these

available for productive investments through stocks and shares.

2.4.2 Prospects for improved performance of the market.

Developments in the Nigerian capital market represent positive indication of the prospects and

promise the market has for the future settling the unresolved problems of the market is an

important task that must be achieved for the future development of the market, in respect to this,

a number of reforms have already been undertaken to refocus the market so as to meet

challenges. For instance, in quest of its deregulation policy which began with the introduction of

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structural adjustment program (SAP) in 1986, several efforts have been made to ensure that the

Nigerian capital market operates like its counter parts in other economies by the government.

The deregulation of interest rates has had a positive effect on the number of private enterprises

sourcing from the market and it has also affected the market and it has also affected the volume

and market capitalization. In 1991, the government deregulated the pricing of securities in the

market by disengaging the SEC from securities pricing. In effect, the stock brokers and issuing

houses are in charge of pricing of pricing of new stocks on the market. Other device has also

been derived to improve the settlement process and brokerage services before the introduction of

central securities clearing system (CSCS) in April, 1997, the process of transacting shares used

to be unnecessarily long and worrisome to investors. With the CSCS, which is a computerized

depository, clearing and settlement system that acts as the clearing house for all shares traded on

the exchange the NSE has evolved a gradual dematerialization of share certificates, thus de-

emphasizing the use of share certificate as evidence of share ownership.

An evaluation of the CSCS shows that the settlement and delivery systems of transaction in the

market have been reduced from 3-6 months to 6days in order to foster continuous stock trading

working hours and allow changing pricing system, the Nigerian stock exchange replaced the old

manual call-over method of trading with the automated trading system (ATS). The ATS is a

computerized electronic system in which dealers from their work stations are connected to a

central server at data control room of the NSE. It is expected that the electronic based trading

system would improve the efficiency of trading, transparency in the market, realistic pricing of

securities and establishing new trading opportunities for dealing members. Apart from that, it

will also establish a trading link within all regional markets in Africa and other parts of the

world. The ATS project was created to make the Nigerian securities markets to be in standards

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with the international market and ensure settlement and delivery of transactions in the market.

Free mobility on foreign investors is also a positive development. The announcement

/proclamation of the Nigerian investment promotion commission OIJIPC Decree No. 16 and the

foreign exchange (monitoring and miscellaneous) provisions Decree No.17 1995 were created to

replace the Nigerian Enterprises promotion Decree of 1989 and the exchange control ACT of

1962. The enabling environment created by these legislations opened up the economy to foreign

investors and also removed barriers restricting foreign investors’ access to the capital market

indigenization ACT which restrict foreign participation in the capital market allowed unrestricted

foreign interest in Nigeria quoted companies, allowed free conversion of capital, capital gains,

dividends, and other interests from investments in securities, allowed unhindered transactions in

the foreign exchange market and it gives room to foreign investors to be able to buy shares of

Nigerian companies in any convertible currency. Other effort was made by resetting the Nigeria

capital market was the regulation of the Denis Odife panel, (1996) to assess the structure and

evaluate the performance of the capital market. The panel’s endorsement resulted in the

promulgation of the all-embracing investment services Decree of 1999 to amend, modify and

codify the provisions of the principal laws and regulations within the capital market as well as

the re-establishment of SEC as the highest regulatory body in the market.

The council recommended the establishment of the Abuja stock exchange, which has started

operation, in addition to twelve capital trading points in other parts of the country. It is assumed

that the new exchange will enhance competition and make the market fully functional and

effective. The recent decision to repeal and refocus the trustee investment ACT of 1962, the

insurance Decree of 1991 and the adaption of the means of sourcing funds for financing capital

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projects the market by the 3 tiers of government would go a long way in enhancing the

deepening of the market.

2.4.3 Stock market development and economic growth.

It has being observed that direct finance through the financial intermediaries is much more

important compare to direct finance through the financial markets, most especially in developing

countries. Therefore, most existing literature focuses on the contributions of the financial

intermediaries to economic growth. Different empirical tests have important value on economic

growth; however, most of the result uses bank-based measures of financial development such as

ration liquid liability of financial intermediaries to GDP and domestic credit to the private sector

divided by GDP. Recently emphasis has increasingly shifted to stock market indicators due to

the increasing function played by financial markets in economies. Just as it was stated in Atje

and Jovanovich (1993). Tested the hypothesis that the stock market has a positive impact on

growth performance. They find significant correlations between economic growth and the value

of stock market trading divided by GDP for 40 countries over the period of 1980-88. Likewise

Levine and Zervos (1996) and Singh (1997) show that stock market development is positively

and robustly associated with long-run economic growth.

Levine and zervos (1998) using cross-country data for 47 countries from 1976-93 show that

stock market liquidity is positively and significantly correlated with current and future rates of

economic growth, even after controlling for economic and political factors. They also find that

measures of both stock market liquidity and banking development significantly predict future

rates of growth. They, therefore, conclude that stock markets provide relevant but distinct/

different financial services from banks.

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Furthermore, using data from 44 industrial development countries from 1976 to 1993, Demirguc-

kunt and Levine (1996) examine the relationships between stock market developments. They

find out that countries with better- developed stock market also have better- developed financial

intermediary. Thus, they conclude that stock market development goes hand-in-hand with

financial intermediary development.

Existing models suggested that stock market development is a diverse concept, involving issues

of market size, liquidity, concentration, integration, volatility with world capital markets, and

institutional development.

Using data on 44 developed and emerging markets from 1986 to 1993, Demirguc-kunt and

Levine (1996) find that large stock markets are more liquid, less volatile, and more

internationally integrated than smaller markets.

Furthermore, institutionally developed markets with strong information revealing laws,

unrestricted capital flows are large, more liquid markets and international accounting standards.

Theory also spotted out a rich array of channels through which the stock markets- market size,

integration with world capital markets, liquidity and volatility- may be linked to economic

growth.

For instance, pagano (1993) shows the increased risk-sharing benefits from larger stock market

size through market externalities, while Levine (1991) and Bencivenga, Smith (1994) and

Obstfeld (1994) show that risk diversification through internationally integrated stock markets is

another means through which stock markets can affect economic growth. Besides stock market

size, integration with world capital markets and liquidity, theorists has investigated stock return

volatility.

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2.4.4 Measures of Stock Market Development and Economic Growth

The empirical evidence by Levine (1996) show supports on the belief that greater stock market

liquidity boosts—or at least precedes- - economic growth. Three ways market liquidity can be

measured and three indicators of how easy it is to buy and sell equities could be identified. One

frequently used measure is the market capitalization as a share of GDP. This indicator expresses

the total value of shares traded ratio and signals weather market size is paired by trading activity.

In other words, it is the value of stock market Levine and Zervos ( 1994). Levine and Zervos

(1996) using regression analysis to the data put together from 41 countries for the years 1976

through 1993 to see the relationship between financial deepening and economic growth. One of

the financial deepening indicators used in the analysis was the level of development of stock

exchange measured by a composite index combining volume, liquidity and diversification

indicators. Economic growth indictor selected, on the other hand, was the real growth rate in per

capita GDP.

Their findings resulted to a very strong positive correlation between stock market development

and economic growth. The most interesting aspect of this study was the decrease in the statistical

significance of other financial deepening variables after stock market development index was

included in the regression equation. According to the authors this was the proof that stock market

development was more influential than other financial deepening indictors on the growth of the

economy.

2.4.5 Critiques of Nigeria’s Stock Market.

The Nigeria stock market was established in 1960, it was later called the Nigeria stock exchange

market with different location at Kaduna, Kano, Onitsha, Port Harcourt, Ibadan, and Lagos. The

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market was a point of capital accumulation for companies shares were issued to public and

shareholders to trade in shares of quoted companies. Some of the instrumental measure of stock

market are stock market size with market capitalization used as its proxy, liquidity, value traded,

concentration, non of listed companies, turnover ratio, ologunde, (2006) using the time series

data on Nigeria span 1981 to 2000. Using the OLS regression techniques, the result shows a

negative relationship between government stocks on market capitalization. However, interest rate

has a positive influence on market capitalization.

In another study carried out by Donwa and Odia (2010) to investigate the impact of Nigeria stock

market on economic growth. Using the OLS regression method, spa 1981 to 2008, surprising, the

authors found a negative relationship between capital market indices or instruments to have no

significant impact on GDP for the sample period covered.

2.5 Conclusion

The theoretical framework, literature review and the empirical framework in regards to this

research work reveal the significance of this work. The literatures explain different approaches

that stock market uses to channel fund for investment in the economy.

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CHAPTER THREE

METHODOLOGY OF RESEARCH

3.0 Introduction

For an investigation to be carryout, a lot of information needs to be put in place for the analysis

to be effective. At this stage, the method to analyze the data such as unit root, co integration and

causality test will be use for the analysis. Data used for the model are annual data from

secondary source from major macro-economic indicators and ARDL econometric model will be

consider for this research work.

3.1 Theoretical framework

The Harrod- Domar Growth Model,

The principal strategy for accelerating economic growth is mobilization of savings and

generation of investment. Importance or merit of Harrod–Domar model: it explains the

mechanism by which investment leads to growth and investment comes from savings.

The rate of economic growth (GDP growth rate) is determined by the ability of the economy to

save (savings ratio) and the capital output ratio. Y = ∆S/∆K, Where Y is the GDP at growth

factor or growth rate, S is the national savings over time, K is the output of the economy, ∆ is the

ratio of savings and output. ∆S/∆Y is ratio of investment of the economy over time. Thus,

∆Y/Y= s/k or S=I.

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3.2 Unit root

Augmented Dicky-fuller (ADF) will be use to check the level of stationarity of the data used

with either at a constant, constant and trend and at none with stationarity at level, at first

difference, and at second difference of the data with a conformity of 1% , 5% and 10% level of

significant respectively. The unit root test is mathematically stated as follows:

Yt = µ + ØFt-1 + ØFt-2 + ØpFt-p +є1t……………………………………..At constant

Pt = ØFt-2 + ØpFt-p + є1 ……………………………………at constant and trend

Yt= µ +ØpFt-1 + Ø2Ft-2 + (Ø1 + Ø2) Yt-1 ………………….at None

3.3 justification of variable

3.3.1 Gross Domestic Product (GDP)

GDP is the total monetary value of goods and services produce in a country over a period of time

usually a year that is measure in a monetary term.

3.3.2 Market Capitalization

Market capitalization is refers to the market worth of a firm or company’s outstanding shares that

measure in monetary term.

3.3.3 Equity (S)

Equity(s) are company owner’s asset that measures the difference between assets of the company

and it liabilities in monetary value.

22

3.3.4 Value Traded

Value traded is refers to the value of stocks traded or share traded over a period of time in a stock

market exchange.

3.4 Model Specification

Base on theoretical frame used, the model for this work is specified in mathematical as well as

econometrical model.

3.4.1 Mathematical Specification

LGDP =F (LMKTC, LEQU, LVALTD)

Where

L = the natural logarithm of the time series data as a result of fluctuation of the data.

LGDP= Gross Domestic Product at it natural logarithm

LMRTC=Market Capitalization at it natural logarithm

LEQU= Equity at it natural logarithm

LVALTD= Number of Value Traded at it natural logarithm

F= function

3.4.2 Econometric Specification

LGDP=βo + β1LMKTC + β2LEQU +β3LVALTD +µ

Where

23

βo= intercept/ constant

β1,β2 ,β3 = The coefficient of the parameters

β1LMKTC = the parameter coefficient of market capitalization

β2LEQU = is the parameter coefficient of equity

β3KVALTD = is the parameter coefficient of total value traded

µ = the error term of the time series data

3.5 Estimation procedure

The econometric model that will be use for this research work is Vector error correction model

(VECM). It is an econometric model use when variables are found to be co integrated and add

error correction features into it specification, exhibit a stationarity at 1st Difference only.

However, the model can be specify as follows to examine the trend of disequilibrium that needed

to be adjusted for equilibrium level of dependent variable to be achieved using the model.

(P1t , P2t ) = Pt

β= (1-β)

βPt = (1-β) (P1t , P2t) = βP1t –β2P2t

Where the value of ‘p’ is the time series of the dependent variable, ‘t’ is the trend of the

disturbance term ‘β’ is the parameter coefficient of the explanatory variables, P1, P2 are the

independent variable to be estimated using the model, βP1t - βp2t is the disequilibrium trend of the

24

Vector Error Correction Model that will be adjusted to achieved equilibrium level of the

dependent variable used in the model.

3.6 source of data

The data for this research work is source from secondary means of some relevant macro-

economic indicators from the period of 1985-2016

Variable Definition period source

GDP Gross Domestic Product 1985-2017 CBNB

LMKTC Market Capitalization 1985-2017 CBNB

LEQU Equity 1985-2017 CBNB

LVALTD Value Trade 1985-2017 CBNB

Note CBNB is central bank of Nigeria statistical Bulletin

3.7 Summary

This chapter comprises of all the methodological approach use for data analysis and the various

areas for sources of the data needed for the analysis. Unit root for testing stationarity, theoretical

framework, justification of variable, specification of the model. Estimation procedure and source

of date.

25

CHAPTER FOUR

Presentation, Analysis, Interpretation and Discussion of Result

4.1 Introduction

This chapter shall focus on results presentation and interpretation base on vital econometric and

statistical techniques of analysis as it was stated in chapter three to facilitate the achievement of

the research objectives.

Table 4.2 Unit root test

Table 1: ADF unit root test

LEVEL 1STDifference LEVEL 1 ST Difference CONSTANT CONSTANT and TREND

LNGDP-2.378257 -3.283250*** 0.536542 -4.330696***

LNMKTC-1.013027 -4.215030** -3.072525 -4.215030**

LNEQU-0.904304 -5.096048*** -2.648623 -5.481396***

LNVALTD 0.938760 -4.032750*** -2.785279 -4.068535**

NOTE: *, **, *** represent 10%, 5% and 1% level of significant respectively

From the table above, the variables indicates stationarity at 1st Difference respectively. This

implies that the data used in the model are stationary by rejecting the null hypothesis of non-

stationary time series data. The stationarity of the data enable us to further conduct the Johansen

co integration test to see if there is long run relationship among the variables used in the model.

The result of the unit root test is in line with the outcome of Usman and Alfa (2013) who used

time series data to investigate the impact of stock market and economic growth in Nigeria from

1981 to 2012 and finds out that the variables are stationary at 1st different with co integration

order of 1(1).

26

Table 4.3 Johansson Co integration Test

Table 2

Unrestricted Cointegration Rank Test (Maximum Eigenvalue)

Hypothesized Max-Eigen 0.05No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.849443 62.48268 27.58434 0.0000At most 1 * 0.781321 50.16502 21.13162 0.0000At most 2 0.267401 10.26819 14.26460 0.1949At most 3 0.003526 0.116559 3.841466 0.7328

Max-eigenvalue test indicates 2 cointegrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values

As presented by Johansson co integration test of TRACE value, it indicate 2 co integration

variables which implies that there is a long-run relationship among the variables used in the

model, this denote the rejection of the null hypothesis of no long-run relationship among the

variables in the model. The result of the long run relationship as revealed by Johansen test,

implies that the variables modeled have a long run effects in explaining the impact of stock

market and economic growth in Nigeria over the period under study. This finding is in line with

Usman and Alfa (2013) in diagnosing the impact of stock market on economic growth in

Nigeria. Also in line with Autonio S. (2010) who investigated the relationship between stock

market and economic growth in Germany and finds that there is a long run relationship among

the variables used in his modeling approach.

27

Table 4.4 Vector Error Correction Model (VECM) Analysis

Table 3

Error Correction: D(LNGDP) D(LNEQU) D(LNMKTC) D(LNVALTD)

CointEq1 -0.595475 0.764034 0.279553 -1.536549 (0.14701) (0.37922) (0.25702) (0.51201)[-4.05064] [ 2.01473]*** [ 1.08765]* [-3.00099]***

D(LNGDP(-1)) 0.985999 -1.268959 -0.361842 2.645452 (0.25407) (0.65541) (0.44422) (0.88491)

[ 3.88076]*** [-1.93612]** [-0.81456] [ 2.98950]***

D(LNGDP(-2)) 0.927479 -3.027109 -0.356612 2.546495 (0.23946) (0.61772) (0.41867) (0.83402)

[ 3.87321]*** [-4.90048]*** [-0.85178] [ 3.05329]***

D(LNEQU(-1)) -0.013248 0.056747 0.014126 -0.032523 (0.04479) (0.11554) (0.07831) (0.15600)[-0.29579] [ 0.49114] [ 0.18038] [-0.20848]

D(LNEQU(-2)) -0.029724 0.103335 -0.031459 -0.245161 (0.04388) (0.11319) (0.07672) (0.15283)[-0.67741] [ 0.91291] [-0.41006] [-1.60417]**

D(LNMKTC(-1)) -0.315064 -0.100227 -0.549735 -0.771479 (0.11996) (0.30945) (0.20974) (0.41781)

[-2.62641]*** [-0.32389] [-2.62109]*** [-1.84649]**

D(LNMKTC(-2)) -0.171171 0.561859 -0.084156 -0.748710 (0.14260) (0.36785) (0.24932) (0.49666)[-1.20036]* [ 1.52740]** [-0.33755] [-1.50748]**

D(LNVALTD(-1)) 0.088285 1.171484 0.594794 -1.413725 (0.14567) (0.37576) (0.25468) (0.50734)[ 0.60608] [ 3.11762]*** [ 2.33547]** [-2.78654]***

D(LNVALTD(-2)) -0.069299 0.473132 0.103742 -0.992049 (0.12387) (0.31953) (0.21656) (0.43141)[-0.55947] [ 1.48072]* [ 0.47904] [-2.29953]**

C 0.368617 -0.258760 0.231238 1.652667 (0.11275) (0.29084) (0.19712) (0.39269)

[ 3.26943]*** [-0.88969] [ 1.17306]* [ 4.20862]***

R-squared 0.900358 0.809998 0.547342 0.443025Adj. R-squared 0.859595 0.732269 0.362164 0.215171F-statistic 22.08776 10.42089 2.955760 1.944341

NOTE: *(1.4), **(1.5), ***(2.5) is the representation of 10%, 5%, and 1% level of significant.

28

From table 4, the result of the Vector Error Correction Model (VECM),cointEq is the speed of

adjustment from disequilibrium to equilibrium level. The cointEq of GDP is negative and

significant at 1% ; the cointEq of equity is positive and significant at 1% while market

capitalization is positive although significant and also value traded is negative and significant at

1% respectively. However, the variables were significant at various level given the lag 1 and lag

2 of the model. At lag 1GDP is positive and significant at 1% also in lag 2; equity is positive

although not significant at both lag 1 and lag 2; market capitalization is negative and significant

at 5% at lag 1 though not significant at lag2; value traded is negative and significant at 1% at lag

1 while it is significant at 5% in lag 2 as revealed by the model.

The analysis of stock market and economic growth as reveal by the model is contrary to the

outcome of Usman, Alfa (2013),who investigated the impact of stock market and arrived at

positive and significant relationship between market capitalization and economic growth in

Nigeria using time series data and Vector Error Correction Model span 1981 to 2012. However,

the result is in line with Autonio (2010) who study the impact of stock market and economic

growth in Germany and arrived at negative relationship between value traded and economic

growth span 1965 to 2007.

R2 of the model stood at 0.90 or 90% in explaining the variation of the explanatory variables of

the model in explaining the dependent variable of the model, this explains the goodness-fit of the

regression model in analyzing the impact of stock market on economic growth of Nigeria. The

adjusted R2 also measures the good fit of the model, however, not sensitive to fluctuation of

variables use in the model and it stood at 0.85 or 85% in explaining the model. The f-statistic

measures the total significant of the independent variables in analyzing the relevant of the model

and it account for 22.08 as indicated in the model.

29

Table 4.5 Serial Correlation Test

Table 4

VEC Residual Serial Correlation LM TestsIncluded observations: 32

Lag LRE* stat Df Prob. Rao F-stat df Prob.

1 30.55783 16 0.0153 2.261199 (16, 43.4) 0.01692 16.57654 16 0.4135 1.056350 (16, 43.4) 0.42243 11.89938 16 0.7509 0.722342 (16, 43.4) 0.7564

The result of LM serial correlation above shows that the series are not correlated at lag 2 and 3

with p-value of 0.4224 and 0.7564 respectively, which implies the rejection of the null

hypothesis of serial correlation of the model through the p-value.

Table 4.6 Heteroskedasticity Test

Table 5

VEC Residual Heteroskedasticity Tests (Levels and Squares)Included observations: 32

Joint test:

Chi-sq Df Prob.

203.2286 200 0.7231

The heteroskedasticity result implies that there is no problem of heteroskedasticity due to the p-

value of 0.7231 > 0.05 level f significant. This implies that the null hypothesis can be rejected as

indicated in the model.

30

Table 4.7 correlation matrix Table 6

LNGDP LNMKTC LNEQU LNVALTDLNGDP 1.000000 0.875764 0.439084 0.897764

LNMKTC 0.875764 1.000000 0.723057 0.928320LNEQU 0.439084 0.723057 1.000000 0.524534

LNVALTD 0.897764 0.928320 0.524534 1.000000

The correlation matrix result signifies the nature of relationship among the variables used in the

model. All the variables are positively correlated which means increase in one variable increases

the dependent variable (LNGDP) as indicated by the model.

4.8 Discussion of Results

The empirical results presented above shows the analysis of the variables in explaining the

impact of stock market on economic growth of Nigeria. The unit root result explains the level of

stationarity of the variables under consideration, the ADF result as presented above, indicated

that the data are stationary at 1st Difference with 1(1) order of con integration in line with Alfa

and Usman (2013). The stationarity of the data implies that the data can be use for empirical

analysis with the rejection of null hypothesis at 0.05 level of non-stationary of time series data.

The result of Johansen co integration test indicate that there exist at most 2 co integration among

the variables which means there is a long-run relationship among the variables included in the

model. The Vector Error Correction Model explains that, there is a significant relationship

between stock market and economic growth with the variables included in the model. The

significance of the model as indicated by level of significant, shows that the model with the

variables used are relevant in explaining the impact of stock market on economic growth of

Nigeria in line with Autonio (2010) who study the impact of stock market and economic growth

31

in Germany and arrived at negative relationship between value traded and economic growth span

1965 to 2007.

The correlation result also indicates a positive correlation among the variables except value

traded and equity which means as one increases in absolute term the other decreases in absolute

term as indicated in the model. The serial correlation test indicates the rejection of the null

hypothesis of serial correlation and accepts the alternative of no serial correlation in the model

through the p-value. The heteroskedasticity test also passed the test of problem of autocorrelation

as the result revealed that the model is free from autocorrelation through its p-value as indicated

in the model.

4.9 Summary

As presented by the chapter, the unit root test past the test of stationarity of the data at 1 st

Difference, Johansen co integration test indicate 2 co integration of the variables implies a long-

run relationship exist among the variables, the Vector Error Correction Model explains the short-

run analysis that exist among the variables which are significant at various level, the correlation

matrix also indicate a positive correlation with the exemption of value traded and equity as

indicated in the model.

32

CHAPTER FIVE

Summary, Conclusion, Suggestion for Further Research and Recommendation

5.1 Summary

This research is summarized base on theoretical framework of Harrod-Domar which base on

savings out of income for investment; the methodology used for this research is base on ADF

unit root test, Johansen co integration test vector error correction model, Heteroskedasticity serial

correlation to examine the impact of stock market on economic growth of Nigeria.

As presented by the chapter, the unit root test past the test of stationarity of the data at 1 st

Difference, Johansen co integration test indicate 4 co integration of the variables implies a long-

run relationship exist among the variables, the Vector Error Correction Model explains the short-

run analysis that exist among the variables which are significant at various level, the correlation

matrix also indicate a positive correlation with the exemption of value traded and equity as

indicated in the model. Thus, it is concluded that stock market increases economic growth in

Nigeria from the period under study.

5.2 Conclusions

The study examines the impact of stock market on economic growth in Nigeria between the

period of 1895 and 2016, using vector error correction model (VECM). The study from the

regression results shows that exist positive and significant relationship between stock market and

economic growth and this relationship is statistically significant .this means that the impact of

stock market on economic growth is strong and significant.

33

Due to the important role that a well structured stock markets play in economic growth;

Nigerians cannot afford to de-motivate the development of its stock exchange. Accounting, legal

regulatory, tax and supervisory system influences stock market illiquidity. The efficiency of

trading systems influences the case and confidence with which investors can buy and sell their

shares. How fast the Nigerian stock exchange moves to assume its rightful position as a major

provider of long term finance needed for Nigeria’s rapid economic development will depend on

how fast the major problems hindering its growth are solved. Stock market is positive and

significant in the growth engine of Nigeria economy through it financial mobilization and

reduction in unemployment rate in the country. Stock market through the empirical analysis

revealed that, the growth of a nation is some worth depends on it financial market such as stock

market and other security market as revealed by the empirical study of this research work.

Finally, the following recommendation should be properly implemented for sustainable growth

and development in Nigeria.

5.3 Suggestion for further research

The study covers from 1985 to 2017, it is advice for other researchers to increase the span of

study to see the effect of stock market on economic growth in Nigeria.

It is also suggested that more stock market variables can be use to checkmate the impact of stock

market on economic growth in the country through other econometric techniques and approaches

The role of financial institution should also be investigated to see their effects on stock market in

Nigeria

34

The investigation of stock and economic growth in Nigeria has been positive, however, its

should be compare with other nations to see if such relationship also exist between them

The problems of stock market in Nigeria should also be investigated for further improvement on

the market to ensure maximum contribution of the market to the country

5.4 Policy Recommendation

To increase the demand for securities is for stock market to create public awareness programs

such as seminars, workshops and lectures in order to notify the public on the benefit they stand to

gain in investing in the stock market.

The government should provide a stable macro- economic environment for the smooth running

of the market and give important role to the stock market development by creating effective

monetary and fiscal policy management.

It is recommend that both formal and informal bodies should partake on the benefit on stock

market through participation and incentives from the government

Stock market plays a significant role in fund mobilization, thus, government should play a

significant role in modeling the market for better growth and improvement on the market to

achieve efficiency

Withholding tax on dividend should be abolished as well as some incentives to companies that

are listed on stock exchange.

Market forces should be allowed o operate without restriction, interference as security pricing is

harmful to the growth of the market.

35

Reduction in the cost of transaction in the stock market in the dealings of stock market in Nigeria

as revealed by VECM analysis

The time span between offering shares for public subscription and allotment of the shares should

be adjusted that is the time span between offering shares for public subscription and allotment of

the shares is long this would discourage investors.

There should be a fully, developed, efficiency resale market for corporate securities.

The market should be empowered through incentives from the government to encourage

participants in the dealings.

The regulation of the market should be done through market forces of demand and supply

interplay in the market to encourage its contribution to economic wellbeing of Nigeria

36

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41

Appendix i.

YEAR LNGDPLNMKTC LNEQU

LNVALTD

19839.53602

11.74046

60.78845

75.98620

1

1984 9.530921.70474

80.87546

95.54712

9

19855.25890

1 1.887070.99325

25.75763

9

19865.31044

41.91692

31.30833

36.21039

9

19875.51921

82.10413

49.91289

35.94646

7

19885.76935

22.30258

59.97394

66.74558

9

19896.03834

82.54944

5 10.41256.41395

1

19906.21396

82.79116

510.5739

55.41787

7

19916.39030

83.13983

310.6386

45.48935

1

19926.81322

53.44041

810.7984

36.19786

9

19937.13812

9 3.8607310.6048

86.69009

7

19947.47466

4 4.1941910.6456

66.89355

5

19957.97080

95.19517

710.8107

27.51686

8

19968.23724

95.65529

210.8095

18.85074

7

19978.32157

75.64155

211.2654

69.24285

6

19988.43141

55.57063

211.3495

99.51569

8

1999 8.576855.70378

211.7240

49.55194

2

20008.83891

16.15761

412.4549

410.2454

1

20019.00382

56.49602

112.9625

410.9627

3

20029.33540

86.63974

5 13.020310.9921

6

42

20039.49563

77.21472

513.3402

1 11.6986

20049.75969

27.65562

713.7886

612.3274

9

200510.0109

9 7.972513.8372

212.4796

6

200610.2633

48.54108

514.1288

213.0610

3

200710.4041

29.48658

514.7767

713.8887

8

200810.5753

49.16565

715.0783

612.0266

1

200910.6984

18.85805

614.3684

213.4382

2

201010.9080

29.20212

714.4699

813.5922

6

201111.0505

89.23749

814.0267

3 13.4356

201211.1804

4 7.24487 13.952613.6035

4

201311.2909

4 9.8562614.9856

6 14.6703

201411.3968

89.73359

414.0070

114.1042

8

201511.4525

99.74116

913.7700

113.7759

6

201611.5277

19.69188

39.13204

421.1351

4

Appendix ii.

Null Hypothesis: LNGDP has a unit rootExogenous: ConstantLag Length: 0 (Automatic - based on SIC, maxlag=7)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -0.715888 0.8290Test critical values: 1% level -3.646342

5% level -2.95402110% level -2.615817

*MacKinnon (1996) one-sided p-values.

43

Null Hypothesis: D(LNGDP) has a unit rootExogenous: ConstantLag Length: 0 (Automatic - based on SIC, maxlag=7)

t-Statistic Prob.*


5% level -2.95711010% level -2.617434


Null Hypothesis: LNGDP has a unit rootExogenous: Constant, Linear TrendLag Length: 0 (Automatic - based on SIC, maxlag=7)

t-Statistic Prob.*


5% level -3.55297310% level -3.209642


Null Hypothesis: D(LNGDP) has a unit rootExogenous: Constant, Linear TrendLag Length: 0 (Automatic - based on SIC, maxlag=7)

t-Statistic Prob.*


5% level -3.55775910% level -3.212361


Null Hypothesis: LNEQU has a unit rootExogenous: ConstantLag Length: 2 (Automatic - based on SIC, maxlag=7)

t-Statistic Prob.*


5% level -2.96041110% level -2.619160


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Null Hypothesis: D(LNEQU) has a unit rootExogenous: ConstantLag Length: 1 (Automatic - based on SIC, maxlag=7)

t-Statistic Prob.*


5% level -2.96041110% level -2.619160


Null Hypothesis: LNEQU has a unit rootExogenous: Constant, Linear TrendLag Length: 0 (Automatic - based on SIC, maxlag=7)

t-Statistic Prob.*


5% level -3.55297310% level -3.209642


Null Hypothesis: D(LNEQU) has a unit rootExogenous: Constant, Linear TrendLag Length: 1 (Automatic - based on SIC, maxlag=7)

t-Statistic Prob.*


5% level -3.56288210% level -3.215267


Null Hypothesis: LNMKTC has a unit root

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Exogenous: ConstantLag Length: 5 (Automatic - based on SIC, maxlag=7)

t-Statistic Prob.*


5% level -2.97185310% level -2.625121


Null Hypothesis: D(LNMKTC) has a unit rootExogenous: ConstantLag Length: 4 (Automatic - based on SIC, maxlag=7)

t-Statistic Prob.*


5% level -2.97185310% level -2.625121


Null Hypothesis: LNMKTC has a unit rootExogenous: Constant, Linear TrendLag Length: 6 (Automatic - based on SIC, maxlag=7)

t-Statistic Prob.*


5% level -3.58752710% level -3.229230


Null Hypothesis: D(LNMKTC) has a unit rootExogenous: Constant, Linear TrendLag Length: 4 (Automatic - based on SIC, maxlag=7)

t-Statistic Prob.*


5% level -3.58062310% level -3.225334


Null Hypothesis: LNVALTD has a unit root

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Exogenous: ConstantLag Length: 0 (Automatic - based on SIC, maxlag=7)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic 0.876773 0.9939Test critical values: 1% level -3.646342

5% level -2.95402110% level -2.615817


Null Hypothesis: D(LNVALTD) has a unit rootExogenous: ConstantLag Length: 1 (Automatic - based on SIC, maxlag=7)

t-Statistic Prob.*


5% level -2.96041110% level -2.619160


Null Hypothesis: LNVALTD has a unit rootExogenous: Constant, Linear TrendLag Length: 0 (Automatic - based on SIC, maxlag=7)

t-Statistic Prob.*


5% level -3.55297310% level -3.209642


Appendix iii.

Null Hypothesis: D(LNVALTD) has a unit root

47

Exogenous: Constant, Linear TrendLag Length: 1 (Automatic - based on SIC, maxlag=7)

t-Statistic Prob.*


5% level -3.56288210% level -3.215267


Date: 05/08/18 Time: 17:58Sample (adjusted): 1985 2016Included observations: 32 after adjustmentsTrend assumption: Linear deterministic trendSeries: LNGDP LNMKTC LNEQU LNVALTD Lags interval (in first differences): 1 to 1

Unrestricted Cointegration Rank Test (Trace)

Hypothesized Trace 0.05No. of CE(s) Eigenvalue Statistic Critical Value Prob.**


Trace test indicates 2 cointegrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values

Unrestricted Cointegration Rank Test (Maximum Eigenvalue)

Hypothesized Max-Eigen 0.05No. of CE(s) Eigenvalue Statistic Critical Value Prob.**


Max-eigenvalue test indicates 2 cointegrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values

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Vector Error Correction EstimatesDate: 05/08/18 Time: 18:02Sample (adjusted): 1986 2016Included observations: 31 after adjustmentsStandard errors in ( ) & t-statistics in [ ]

Cointegrating Eq: CointEq1

LNGDP(-1) 1.000000

LNMKTC(-1) -1.426333 (0.33954)[-4.20080]

LNEQU(-1) 1.525952 (0.31291)[ 4.87658]

LNVALTD(-1) -0.521140 (0.31752)[-1.64130]

C -12.71101

Error Correction: D(LNGDP) D(LNMKTC) D(LNEQU) D(LNVALTD)

CointEq1 0.070437 0.314565 0.620450 -0.890673 (0.02257) (0.14627) (0.20854) (0.29569)[ 3.12150] [ 2.15053] [ 2.97523] [-3.01219]

D(LNGDP(-1)) -0.150847 -0.775117 -1.755263 2.639166 (0.06621) (0.42921) (0.61191) (0.86764)[-2.27825] [-1.80593] [-2.86850] [ 3.04179]

D(LNGDP(-2)) -0.184279 -0.758503 -3.484056 2.523892 (0.06305) (0.40873) (0.58271) (0.82623)[-2.92263] [-1.85577] [-5.97905] [ 3.05469]

D(LNMKTC(-1)) 0.061601 -0.394459 0.027647 -0.778107 (0.03396) (0.22013) (0.31384) (0.44499)[ 1.81398] [-1.79192] [ 0.08809] [-1.74858]

D(LNMKTC(-2)) 0.061792 -0.013515 0.649630 -0.715484 (0.03582) (0.23219) (0.33102) (0.46937)[ 1.72513] [-0.05821] [ 1.96248] [-1.52436]

D(LNEQU(-1)) -0.002236 -0.032240 -0.049981 0.128639 (0.01208) (0.07832) (0.11166) (0.15832)

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[-0.18508] [-0.41165] [-0.44762] [ 0.81252]

D(LNEQU(-2)) -0.004771 -0.067775 0.009818 -0.097302 (0.01170) (0.07584) (0.10813) (0.15331)[-0.40779] [-0.89364] [ 0.09080] [-0.63467]

D(LNVALTD(-1)) 0.065246 0.489939 1.156676 -1.246372 (0.03355) (0.21746) (0.31003) (0.43960)[ 1.94492] [ 2.25299] [ 3.73086] [-2.83527]

D(LNVALTD(-2)) -0.015999 0.124681 0.531734 -1.018642 (0.03157) (0.20466) (0.29178) (0.41372)[-0.50673] [ 0.60921] [ 1.82237] [-2.46215]

C 0.180565 0.330699 -0.023860 1.152725 (0.02363) (0.15315) (0.21834) (0.30958)[ 7.64287] [ 2.15936] [-0.10928] [ 3.72346]

R-squared 0.445999 0.410377 0.838783 0.482229Adj. R-squared 0.208569 0.157681 0.769690 0.260327Sum sq. resids 0.186266 7.827014 15.90877 31.98431S.E. equation 0.094180 0.610504 0.870379 1.234124F-statistic 1.878449 1.623995 12.13994 2.173165Log likelihood 35.28865 -22.65280 -33.64678 -44.47160Akaike AIC -1.631526 2.106632 2.815921 3.514297Schwarz SC -1.168949 2.569209 3.278498 3.976873Mean dependent 0.202220 0.251768 0.262542 0.496048S.D. dependent 0.105865 0.665197 1.813646 1.434958

Determinant resid covariance (dof adj.) 0.001361Determinant resid covariance 0.000287Log likelihood -49.51221Akaike information criterion 6.033046Schwarz criterion 8.068382Number of coefficients 44

Correlation matrix

LNGDP LNMKTC LNEQU LNVALTDLNGDP 1.000000 0.040542 0.006564 0.246240

LNMKTC 0.040542 1.000000 0.026355 0.319209LNEQU 0.006564 0.026355 1.000000 -0.687085

LNVALTD 0.246240 0.319209 -0.687085 1.000000

VEC Residual Serial Correlation LM TestsDate: 05/08/18 Time: 18:04Sample: 1983 2016Included observations: 31

Null hypothesi

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s: No serial

correlation at lag h

Lag LRE* stat df Prob. Rao F-stat df Prob.

1 17.50527 16 0.3537 1.126441 (16, 43.4) 0.36252 34.51424 16 0.0046 2.667343 (16, 43.4) 0.0053

Null hypothesi

s: No serial

correlation at lags

1 to h

Lag LRE* stat df Prob. Rao F-stat df Prob.

1 17.50527 16 0.3537 1.126441 (16, 43.4) 0.36252 48.01066 32 0.0343 1.748497 (32, 38.5) 0.0491

*Edgeworth expansion corrected likelihood ratio statistic.

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