Capital market provides the industries and governments long term funds to meet their long term capital requirement such as financing of fixed investment like buildings, plants, machinery, bridges, e.t.c. Therefore, despite all these enormous performance, capital market still faces setback in the economy. Capital market that
has been performing enormously in its operation is invariably affected by the level of inflation in Nigeria. The study empirically examines the effect of inflation on capital market performance in Nigeria. In line with the objectives of this study, secondary data were obtained from central bank of Nigeria statistical bulletin and
Security exchange commission (SEC) covering the period of 1970 to 2010.Multiple regressions were employed to analyze data on variables such as inflation rate, market capitalization, All-Share index, market volume and market turnover, and Gross Domestic Product with the adjusted R2 which significant at 0.1821(18.2%), it presages that inflation accounted for 18.2% of the variation in the influence of the capital market performance.
The effect of inflation on performance of Nigerian capital market is weak. All the measures showed a negative relationship to inflation except MVOL which showed a deviation from a priori expectation as revealed by the positive correlation between inflation and the market volume. It is therefore concluded that there is a negative relationship between inflation and capital market performance. The result suggest that the Central Bank of Nigeria (CBN) should design and implement policy instruments that will maintain inflation at a reasonably low level so that it will not wear away the real value of stock returns.
THE IMPACT OF INFLATION ON THE PERFORMANCE OF CAPITAL MARKET IN NIGERIA
1.1 BACKGROUND TO THE STUDY
The capital market has been identified as an institution which contributes to the socio-economic growth and development of emerging and developed economies. This is made possible by the intermediary role played by the capital market in mobilizing funds from surplus units to deficits units to be invested into projects with positive net present value (NPV) which may enhance economic growth of the nation (Donwa and Odia 2011). Osaze (2009) sees the capital market as a driver of any economy to growth and development because it is essential for long-term growth capital formation. It is crucial in the mobilization of savings and channeling of such funds i.e. savings to profitable self-liquidating investment. Capital market offers access to a variety of financial instruments that enable economic agents to pool, price, and exchange risk. Through assets with attractive yields, liquidity and risk characteristics, it encourages savings in financial form. This is very essential for government and other institutions in need of long-term funds and for suppliers of long term funds (Nwankwo, 2001). The vital roles played by the capital market in the achievement of economic growth thereby enables government, industries,
corporate bodies to raise long-term capital for the purpose of financing new projects, expanding and modernizing industrial concerns. A unique benefit of
the capital market to corporate entities is the provision of long-term, non-debt financial capital. Based on its importance in accelerating economic growth and development, government of most nations tends to have keen interest in the performance of its capital market. The concern is for sustained confidence in the market and for a strong investors’ protection arrangement (Ewah et al.2009).
The Central Bank of Nigeria is empowered to perform duties that ensure soundness of the financial and monetary system. In order to achieve the monetary stability, it is always confronted with the challenge of choosing the right strategy to apply in order to meet the envisaged end. Among the most popular and accepted strategies are, capital market targeting, exchange rate targeting, monetary targeting, nominal GDP targeting and inflation targeting. Inflation targeting is the process of offering
a framework of constrained discretion in which the constraint is the inflation target and the discretion is the scope and flexibility of taking account of economic and other considerations (Kuttner & Posen 2000). Svensson (2001) viewed that inflation targeting is that form which disregards entirely the real effect of monetary policy both in the short and medium term and focuses exclusively on controlling inflation within the shortest possible time horizon. Hence, rapid output growth and low inflation are the most common objectives of macro-economic policy.
Some scholars concurs that inflation may also reduce a country’s international competitiveness, by making its exports relatively more expensive, thus impaction negatively on the balance of payment, capital market performance, in addiction reducing capital accumulation and productivity growth. The main aim of this study is to empirically analyse the effects of inflation on the performance of Nigerian capital market.
1.2 STATEMENT OF THE PROBLEM
Most recent literatures on the Nigeria capital market have recognized the enormous performance the market has recorded in recent times. This situation is prevalent in the Nigerian economy. Capital market provides the industries and governments long term funds to meet their long term capital requirement such as financing of fixed investment like buildings, plants, machinery, bridges, e.t.c. Therefore, despite all these enormous performance, capital market still faces setback in the economy. Capital market that has been performing enormously in its operation is invariably affected by the level of inflation in Nigeria. Inflation impedes efficient resource allocation by obscuring the signaling role of relative price changes, the most important guide to efficient economic decision-making Fischer (2003). With this, there is the need to empirically examine the effect of inflation on capital market performance in Nigeria.
1.3 OBJECTIVES OF THE STUDY
The main aim of this study is to empirically analyse the effects of inflation on the performance of Nigerian capital market. Deriving from this, the study sets to achieve the following specific objectives;
To empirically evaluate the determinants and effects of inflation on Nigerian economy.
To determine the long run effects of inflation on capital market performance.
To critically investigate the effect of inflation on gross domestic products
1.4 RESEARCH QUESTION
The main research question of this study is there relationship between inflation and the Nigerian capital market performance. Specifically the research will ask:
i. What is the effect of inflation on the performance of capital market?
ii. To what extent has inflation affected stock exchange in Nigeria?
1.5 STATEMENT OF HYPOTHESIS
A hypothesis is a tentative statement linking two or more variable in a correlation to establish a relationship that, further subjection to test will confirm such relationship as either positive or negative. The following are the two hypotheses that are to be tested.
Ho: Inflation does not have any significance impact on the capital market performance.
Hi: Inflation has significance impact on the capital market performance.
1.6 SIGNIFICANCE OF THE STUDY
This significant of the study is that, it will unfold the major factors influencing the capital market and the Nigerian stock exchange at large. In this regard, this study will be of great benefit to the government, development economists, and the central bank of Nigeria, planning authorities, policy makers, researchers, business communities, investors, brokers and individual households.
This study will enable Nigerian policy makers to identify the significant variables influencing capital market and the Nigerian stock exchange in the economy. The identification of these variables will enable the appropriate management of these variables in the right direction to achieve growth in capital market in the economy and national income which will result in economic growth and development.
The findings of this study will also complement other existing studies by contributing immensely to the literature on the impact of inflation on the performance of capital market in Nigeria. Lastly, this study will provide reference resources for intending student researchers in this area.
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