## ABSTRACT

Journal of Inclusive Finance and Social Policy

Vol. 1 No. 1, pp 39-52

http://jifsp.com | © Sahulat Microfinance Society

The stock market is an organized market where brokers meet to buy and sell stocks and shares, capital market capitalization rates, government stock rates, rates of interest change on financial institution exert some impact or development and growth of the economy. This research is aimed at determining the relationship between GDP, market capitalization and also the effect of these macroeconomic variables has on the Gross Domestic Product of Nigeria.

The statistical method used in analysing the data is the multiple linear regression models which establish the relationship between variables as well as deciding the limit of such relationship. The analysis was done in two stages, firstly Market Capitalization as the dependent variable and the predictors (Independent variables) include: All Share Index, Volume and Value Stock, Number of Deals, Inflation rate, Lending rate, Unemployment. rate and Gross Domestic Product. Multicollinearity was detected in the first analysis and that necessitate the second analysis on Market Capitalization as the dependent variable and the predictors include Gross Domestic Product., VVS and Number of Deals. The model explains 96.79% variation in the data. The adjusted R2 is 95.60% indicating that the model explains 95.60% of the variation in the data when used for prediction. The variables which include volume & value of stock, number of deals and GDP are significant with P-value of 0.001, 0.044 % 0.004 respectively.

Keyword: Stock Market, Market Capitalization, Multiple Regression, Multicollinearity.

- Nasarawa Polytechnic Nasarawa, Department of mathematics and statistics, Nasarawa, Nasarawa State
- Nasarwa State University , Faculty of natural and applied science, Department of statistics, Keffi, Nasarawa State. Email: maijammab@nsuk.edu.ng (Corresponding Author)
- Nasarwa State University , Faculty of natural and applied science, Department of statistics, Keffi, Nasarawa State.

## INTRODUCTION

The stock market is an organized market where brokers meet to buy and sell stocks and shares. The stock market or equity or capital market is a public market (a loose network of economic transactions, not a physical facility or discrete entity) for the trading of company stock and derivatives at an agreed price, there are securities listed on a stock exchange as well as those only traded privately. The stock market is the aspect of the financial system which mobilizes and channels long term funds for economic growth. According to the Stock Market Investing Guide (2010), the irony of stock market is that companies live and die by their stock price, yet for the most part they don't actively participate in investing and in trading their stocks within the market.

It is a known fact that economic growth and development require long term funding, far longer than the duration for which most savers are willing to commit their funds. Capital market is a collection of financial institution set up for the granting of me down and long term loans. It is a market for government securities, for co-prate bonds for mobilization and utilization of long term funds for development of the long term end of the financial system (Adesola S. M. 2001). In this market leaders {investors} provides long term funds in exchange for long term financial assets offered by borrowers. This market embraces both the new issues {primary} market and secondary market such securities might be raised in an organized market such as the stock exchange. In this sense, it involves an association of companies for some definite purpose [syndicate] under writings syndicated loan and project financing. Thus, it is a mechanism whereby economic unit desirous to invest their surplus funds, interact directly or through financial mediator with those who wish to procure funds for their business.

In the Nigerian context, participant include Nigerian stock exchange, discount houses, development bank, investment banks, building societies, stock broking firms, insurance and pension organizations, quoted companies, the government, individuals and the Nigerian stock exchange commission [NSEC]. The capital market is therefore very important to any economy because, it encourages savings and real investment in any healthy economic environment. (Anyawu 1993-2004): Gabriel N. et al (2015)

Though, the market aggregate savings are channeled into real investment that increases the capital stock and therefore economic growth of the country. More so, the capital markets synchronize the divergent. Preference for portfolio managers and financial institution and those of servers by mobilizing long-term funds portfolio managers and financial institutions while providing avenues for savers to invests when the needs arises through the secondary markets, without affecting the operation of the firm (Adaramola A. O. (2011): Amadi S. N., Onyema J. I., & Odubu T. D (2012). Their savings and earlier financed in other words, through secondary market, the capital market convert long term or perpetual investment enlarges and economics growth accelerated.

By far the greatest achievement of the central bank of Nigeria since it was established on July 1st 1959 has been the gradual development of the Nigeria financial system. The system consists primarily of the money market for short term. Lending and borrowing. The Nigeria stock exchange [formally called the Lagos stock exchange] is the pin around, which the entire capital market rotates. It is the market for the sale and purchase of the securities, stock and share. A market in which those individuals, institution and government who has funds surplus to their immediate requirements can employ them profitably. It major significance is that it is the machinery for the mobilization of countries resource for economic growth and development. Since its establishment in 1961, a major local investment outlet has been provided for Nigeria investor. As a market place where securities [stock, bound and share] are bought and sold openly with relative case, the stock exchange is very important to investors (Donatas P., Vytautas B. (2009):Edame, G. E. and Okoro U. (2010). The existence of a stock exchange in a capital market help to broaden the share ownership base of firms and evenly distribute the nation’s wealth by making it possible for people in different locations to own share in a firm in another location by purchasing the share, bond/stock through the simple mechanism of the stock market for the government therefore the stock exchange provides the mechanism for exchanging the mobilization of the capital for creating goods and services for the satisfaction and well been of the citizen (Mahedi, M, (2012): Zucchi, K. (2013). The stock exchange is not only crucial but also central to the entire mobilization process. This is because it offers an opportunity for continues trading in security.

## STATEMENT OF PROBLEM

The capital of stock market are features of the economics of western democracies which does not exist in community or socialist countries for they have no business doing them in the western capitalist countries. It is an important institution for measuring captive formation geared towards economic development. The complexity of capitalist ideologies result in a control and measures puts the economy in equilibrium state. Factors such as capital market capitalization rates, government stock rates, rates of interest change on financial institution amongst other exert some impact or development and growth of the economy. This research is aimed at determining the relationship between GDP, market capitalization and also the effect of these macroeconomic variables has on the Gross Domestic Product of Nigeria

This research should be able to answer the following research questions, what are the effects of the component of macroeconomic variables on Market Capitalization in Nigeria? Are the error terms of the predictors’ homoscedastic or heteroscedastic in nature? Is there presence of multicollinearity between the explanatory variables? Are the variables autocorrelated?

The study is aimed at evaluating the relationship between GDP, Market Capitalization and some macroeconomic variables in Nigeria. Through the following objectives,

- To verify the effect of each component of macroeconomic variables including All Share Index, Volume & Value of Stock, Number of Deals, Inflation Rate, Lending Rate and Unemployment Rate, GDP on Market Capitalization.
- To determine whether the error term of the predictors is homoscedastic in nature.
- To detect whether multicollinearity exists between the explanatory variables.
- To determine whether the variables are autocorrelated.

This research will be significant to policy makers in formulating policy that will regulate inflation to suit the economy. useful to monetary houses like central and commercial banks and importance to students who want to make further research in the study

## METHODOLOGY

The data used in this research work is Central Bank of Nigeria and National Bureau of Statistics bulletin for the period 1990 – 2016.

Data collected for this research work is a secondary data on Gross Domestic Product (GDP), Market capitalization and some selected Macroeconomic variables (All share index, volume and value of stocks, Number of deals, Inflation Rate, Unemployment rate and Lending rate)

This research work covers Gross Domestic Product (GDP) rate in Nigeria, Market Capitalization and some selected Macroeconomic variables (All share index, volume and value of stocks, Number of deals, Inflation Rate, Unemployment rate and Lending rate)

The samples of this research work includes some selected variables including Gross Domestic Product (GDP), Market capitalization and some selected macroeconomic variables (All share index, volume and value of stocks, Number of deals, Inflation Rate, Unemployment rate and Lending rate for the period of 1990 – 2016.

## METHOD OF DATA ANALYSIS

The statistical method to be used in the analysis of the data collected is the multiple linear regression models which establish the relationship between variables as well as deciding the limit of such relationship.

From the data in table 4.1 above, the first and second analysis was done. The first analysis has Market Capitalization as the dependent variable and the predictors (Independent variables) include: ASI, VVS, No. of Deals, Inflation rate, Lending rate, Unemp. rate and GDP. Multicollinearity was detected in the first analysis and that necessitate the second analysis. The second analysis has Market Capitalization as the dependent variable and the predictors include: GDP, VVS and Number of Deals.

## RESULTS

From the data (At the appendix 1)on market capitalization and some macroeconomic variables, the response variable (Dependent variable) is Market Capitalization and the Predictors (Independent variables) include: ASI, VVS, NO. OF DEALS, INFLATION RATE, LENDING RATE, UNEMP. RATE & GDP.

**TABLE 1: Multiple Regression Results for Variables for Period
1990 – 2016.**

Dependent Variable: Market Capitalization | |||

Independent Var. | Estimates | t-value | Pr(>|t|) |

INTERCEPT | -6.300e+03 | -3.806 | 0.00119 ** |

ASI | 8.327e-02 | 1.468 | 0.15855 |

VVS | 5.928e-03 | 3.803 | 0.00120 ** |

NOOFDEALS | -2.105e-03 | -2.158 | 0.04393 * |

INFRATE | -8.589e+00 | -0.416 | 0.68193 |

LENDINGRATE | 1.236e+02 | 1.153 | 0.26340 |

UNEMRATE | -1.154e+01 | -0.092 | 0.92775 |

GPD | 2.401e-01 | 3.292 | 0.00383 ** |

Signif. codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Residual standard error: 1401 on 19 degrees of freedom

Multiple R-squared: 0.9679,

Adjusted R-squared: 0.956

F-statistic: 81.73 on 7 and 19 DF,

P-value: 7.759e-13

## DISCUSSION OF RESULTS

From the results obtained from table 4.2, there is a positive relationship between market capitalization and GDP of Nigeria. A unit increase in GDP results in an increase in market capitalization by 24.01%. The implication of this is that market capitalization responds to measures taken to increase the Nation’s GDP. This implies that when GDP rises above consensus or expectations of GDP rises, corporate earnings increase, which makes it more optimistic for stocks.

There is also a positive relationship between All Share Index and Market capitalization. A unit increase in ASI results in an increase in market capitalization by 8.33%. The implication of this is that the market capitalization responds to the changing average value of the share prices of all companies on a stock exchange. This is so because ASI directly relates to market capitalization which directly relates to GDP. The Nigerian Stock Exchange uses all share Index that considers an aggregate of the market capitalization of all equities listed on the market and traded.

The result from this research shows a negative relationship between Number of Deals and Market Capitalization. A 100% increase in number of deals will reduce the market capitalization by 0.211%. This implies that the number of deals each listed company made in general on the Nigerian Stock Exchange reduced because of decrease in prices of the shares listed, low return of these shares etc and these decrease affect market capitalizations.

The study reveals a positive relationship between volume and value of stock and market capitalization. A unit increase in VVS results in an increase in market capitalization by 0.593%. This implies that market capitalization responds favorably to the measures taken to increase the transactions in the stock market. It also implies that value of shares is high and it will add to the profit of the stock market which adds to the economic income of Nigeria thereby relating to market capitalization.

The research presents a negative relationship between inflation rate and market capitalization of Nigeria. When inflation rate is high, the general prices of goods and services will increase and this will make people buy fewer goods and services will increase and this will make people buy fewer goods with more money. This thereby reduces the amount they can safe because they would want to buy their basic needs, they will not bother investing the money they get, so this as a result will affect the buying of securities at the stock market thereby reducing it. An increase in demand will increase the price of a share and also a decrease in demand will lower the price of a share. With high inflation rate, the prices of shares tend to fall. When securities are quoted with their prices higher, it will attract investors, but when prices of securities fall, securities will not be demanded, according to investors, the returns on these securities will be low and this will make the profits of the organizations reduce because the prices are low. This implies that when inflation rises, market share prices tend to fall because the purchasing power of payments is eroded, so also, the numbers of investments in the stock market reduces. We cannot rely on rising inflation rate to measure market capitalization performance.

The study also reveals a positive relationship between lending rate and market capitalization. A unit increase in lending rate results in an increase in market capitalization by 12400%. This implies that the market doesn’t like high interest rate as it can increase costs for companies across a wide range of measures. Increase cost can result in lower profits and subsequently lower stock prices. This also implies that Nigeria market capitalization responds positively to lending rate in the country.

The research also presents a negative relationship between unemployment rate and market capitalization. A unit increase in unemployment rate results in a decrease in market capitalization by 1200%. This shows that unemployment has risen unabatedly. While economic growth curtails unemployment, capital market development fails to limit unemployment. The stock market has grown over the years at the expense of job creation in Nigeria.

The F-statistics is used to measure the overall significance of the model. Since the F-statistics is significant, the null hypothesis which states that the components of macroeconomic variables do not have any effect on market capitalization is rejected and the alternative hypothesis accepted. We therefore conclude from our regression analysis that components of macroeconomic variables have significant effect on Nigeria’s market capitalization.

The model explains 96.79% variation in the data. The adjusted R2 is 95.60% indicating that the model explains 95.60% of the variation in the data when used for prediction. The variables which include volume & value of stock, number of deals and GDP are significant with P-value of 0.001, 0.044 % 0.004 respectively. While variables including all share index, inflation rate, lending rate and unemployment rate are not significant since their P-values of 0.159, 0.682, 0.263 and 0.928 respectively are greater than α (0.05). This could be due to presence of multicollinearity. The serial correlation test is used to describe the relationship between observations of the same variable over specific period of time. The Durbin Watson statistic is employed to test for serial correlation in the data set. The DW statistic always has a value between zero and 4.0. A value of 2.0 means there is no serial correlation detected in the samples. Values from zero to 2.0 indicate positive serial correlation and values from 2.0 to 4.0 indicates negative autocorrelation. The Breusch-Godfrey serial correlation LM test is also used to test for autocorrelation in the errors in a regression model. It makes use of the residuals from the model being considered in a regression analysis and a test statistic is derived from these.

## SERIAL CORRELATION TEST

### DURBIN WATSON TEST

HO: There is no serial correlation

HO: There is serial correlation

The Durbin-Watson statistics is used to test for the presence of autocorrelation in the variables. Durbin Watson calculated is equal to 2.25 which is strong enough. The P-value from the DW test is 0.2965 > α (0.05). This implies that there is no serial correlation.

## BREUSCH GODFREY LM TEST

HO: There is no serial correlation

H1: There is serial correlation

The Breusch Godfrey test LM is equal to 1.3972 with P-value equal to 0.2372 > α (0.05). This implies that we accept the null hypothesis and conclude that there is no serial correlation.

## HETEROSCEDASTICITY TEST

The Breusch-Pagan (BP) test is one of the most common tests for heteroscedasticity. It begins by allowing the heteroscedasticity process to be a function of one or more of the independent variables.## BREUSCH PAGAN GODFREY TEST

HO: Residuals are homoscedastic

H1: Residuals are not homoscedastic

BP equals 14.575 with P-value equal to 0.04185 < α (0.05). This implies we accept the alternative hypothesis and conclude that the residuals are not homoscedastic

## MULTICOLLINEARITY TEST

From the all individual multicollinearity diagnostic result, all share index, inflation rate, lending rate and unemployment rate coefficients are non-significant and may be due to multicollinearity. Also, from the overall multicollinearity diagnostic, only the Theil’s method failed to detect a case of multicollinearity. More also, from the VIF multicollinearity diagnostic, volume and value of stock, number of deals, unemployment rate and GDP has a VIF > 10. This implies that these variables are correlated with other predictors. (See appendix B)

This will lead to facing out multicollinearity using step-wise regression method (Forward Selection Method).

## STEP-WISE REGRESSION (FORWARD SELECTION METHOD)

4.6.1 Regression Analysis: MARKETCAP versus ASI, VVS, NOOFDEALS, INFRATE, LENDINGRATE, UNEMRATE, GDP

**Table 2: Forward Selection of Terms**

STEP 1 | STEP 2 | STEP 3 | ||||
---|---|---|---|---|---|---|

Coefficient | p-value | Coefficient | p-value | Coefficient | p-value | |

Constant | -7865 | -5441 | -4754 | |||

GDP | 0.3588 | 0.000 | 0.2444 | 0.000 | 0.2321 | 0.000 |

VVS | 0.003818 | 0.000 | 0.00638 | 0.000 | ||

NODEALS | -0.001560 | 0.027 |

The result from the step wise regression shows that step 3 which has the variables Gross Domestic product (GDP), Volume & Value of Stocks (VVS) and Number of Deals (NOD) is devoid of multicollinearity

**TABLE 3 Multiple Regression Results For Variables For Period 1990 –
2016.**

Dependent Variable: Market Capitalization | |||
---|---|---|---|

Independent Var. | Estimates | t-value | Pr(>|t|) |

INTERCEPT | -4.755e+03 | -5.527 | 1.27e-05*** |

VVS | 6.380e-03 | 4.729 | 9.14e-05*** |

NOOFDEALS | -1.559e-03 | -2.356 | 0.0273 * |

GPD | 2.322e-01 | 8.043 | 3.91e-08*** |

Signif. codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Residual standard error: 1393 on 23 degrees of freedom

Multiple R-squared: 0.9615,

Adjusted R-squared: 0.9565

F-statistic: 191.7 on 3 and 23 DF,

P-value: < 2.2e-16

## DISCUSSION OF RESULTS

There is a positive relationship between market capitalization and GDP of Nigeria. A unit increase in GDP results in an increase in market capitalization by 23.21%. The implication of this is that market capitalization responds to measures taken to increase the Nation’s GDP. This implies that when GDP rises above consensus or expectations of GDP rises, corporate earnings increase, which makes it bullish for stocks.

There is also a positive relationship between volume and value of stock and market capitalization. A unit increase in VVS results in an increase in market capitalization by 0.638%. This implies that market capitalization responds favourably to the measures taken to increase the transactions in the stock market. It also implies that value of shares is high and it will add to the profit of the stock market which adds to the economic income of Nigeria thereby relating to market capitalization.

The study reveals a negative relationship between Number of Deals and Market Capitalization. A 100% increase in number of deals will reduce the market capitalization by 0.156%. This implies that the number of deals each listed company made in general on the Nigerian Stock Exchange reduced because of decrease in prices of the shares listed, low return of these shares and these decrease affect market capitalizations.

The F-statistics is used to measure the overall significance of the model. Since the F-statistics is significant, the null hypothesis which states that the components of macroeconomic variables do not have any effect on market capitalization is rejected and the alternative hypothesis accepted. We therefore conclude from our regression analysis that components of macroeconomic variables have significant effect on Nigeria’s market capitalization.

The model explains 96.15% variation in the data. The adjusted R2 is 95.65% indicating that the model explains 95.65% of the variation in the data when used for prediction. The variables which include volume & value of stock, number of deals and GDP are significant with P-value of 0.000, 0.027 & 0.000 respectively. This indicates that there is no presence of multicollinearity. The serial correlation test is used to describe the relationship between observations of the same variable over specific period of time. The Durbin Watson statistic is employed to test for serial correlation in the data set. The DW statistic always has a value between zero and 4.0. A value of 2.0 means there is no serial correlation detected in the samples. Values from zero to 2.0 indicate positive serial correlation and values from 2.0 to 4.0 indicates negative autocorrelation. The Breusch-Godfrey serial correlation LM test is also used to test for autocorrelation in the errors in a regression model. It makes use of the residuals from the model being considered in a regression analysis and a test statistic is derived from these.

## CONCLUSION

The research employed econometric tools to analyze the time series data sourced from National Bureau of Statistics annual bulletin (1990 – 2016). The results from the econometrics analysis showed there was a positive relationship between market capitalization and all share index, volume & value of stocks, lending rate and gross domestic product. So with this, the government can rely on these variables to promote her market capitalization. There was a significant negative relationship between market capitalization and number of deals, inflation rate and unemployment rate. These maybe caused by the erosion in the purchasing power of investors due to high inflation rate and loss of confidence by investors who were disappointed about the decrease in share prices. From these results, we can infer that these macroeconomic variables have side effect on market capitalization.

## RECOMMENDATIONS

The research recommends the following,

- There is need for the government through the Central Bank of Nigeria to implement policy that will increase the level and size of market capitalization in the capital market. This will in turn provide the needed funds for local investors and organizations to participate fully in the market.
- The negative impact of number of deals also calls for proper policies to be implemented so as to attract more investors to invest in the market. There is need to relax some stringent registration and operating procedures to enable more investors and organizations to participate fully in the market.
- Efforts should be geared towards efficient capital market development to enhance mobilization of funds for long term investment by firms and propel job creation.
- Further reduction of bank rate in the economy will help in facilitating the financial sector development as well as to stimulate the investment level both nationally and internationally.

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