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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.
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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
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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
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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.
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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).
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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
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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.
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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
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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
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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.
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Null Hypothesis: D(LNGDP) has a unit rootExogenous: ConstantLag Length: 0 (Automatic - based on SIC, maxlag=7)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -5.177638 0.0002Test critical values: 1% level -3.653730
5% level -2.95711010% level -2.617434
*MacKinnon (1996) one-sided p-values.
Null Hypothesis: LNGDP has a unit rootExogenous: Constant, Linear TrendLag Length: 0 (Automatic - based on SIC, maxlag=7)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -4.853509 0.0023Test critical values: 1% level -4.262735
5% level -3.55297310% level -3.209642
*MacKinnon (1996) one-sided p-values.
Null Hypothesis: D(LNGDP) has a unit rootExogenous: Constant, Linear TrendLag Length: 0 (Automatic - based on SIC, maxlag=7)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -5.412522 0.0006Test critical values: 1% level -4.273277
5% level -3.55775910% level -3.212361
*MacKinnon (1996) one-sided p-values.
Null Hypothesis: LNEQU has a unit rootExogenous: ConstantLag Length: 2 (Automatic - based on SIC, maxlag=7)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -3.747926 0.0081Test critical values: 1% level -3.661661
5% level -2.96041110% level -2.619160
*MacKinnon (1996) one-sided p-values.
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Null Hypothesis: D(LNEQU) has a unit rootExogenous: ConstantLag Length: 1 (Automatic - based on SIC, maxlag=7)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -2.870427 0.0604Test critical values: 1% level -3.661661
5% level -2.96041110% level -2.619160
*MacKinnon (1996) one-sided p-values.
Null Hypothesis: LNEQU has a unit rootExogenous: Constant, Linear TrendLag Length: 0 (Automatic - based on SIC, maxlag=7)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -1.317395 0.8658Test critical values: 1% level -4.262735
5% level -3.55297310% level -3.209642
*MacKinnon (1996) one-sided p-values.
Null Hypothesis: D(LNEQU) has a unit rootExogenous: Constant, Linear TrendLag Length: 1 (Automatic - based on SIC, maxlag=7)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -3.933493 0.0224Test critical values: 1% level -4.284580
5% level -3.56288210% level -3.215267
*MacKinnon (1996) one-sided p-values.
Null Hypothesis: LNMKTC has a unit root
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Exogenous: ConstantLag Length: 5 (Automatic - based on SIC, maxlag=7)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -0.530183 0.8707Test critical values: 1% level -3.689194
5% level -2.97185310% level -2.625121
*MacKinnon (1996) one-sided p-values.
Null Hypothesis: D(LNMKTC) has a unit rootExogenous: ConstantLag Length: 4 (Automatic - based on SIC, maxlag=7)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -4.231576 0.0027Test critical values: 1% level -3.689194
5% level -2.97185310% level -2.625121
*MacKinnon (1996) one-sided p-values.
Null Hypothesis: LNMKTC has a unit rootExogenous: Constant, Linear TrendLag Length: 6 (Automatic - based on SIC, maxlag=7)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -2.360784 0.3900Test critical values: 1% level -4.339330
5% level -3.58752710% level -3.229230
*MacKinnon (1996) one-sided p-values.
Null Hypothesis: D(LNMKTC) has a unit rootExogenous: Constant, Linear TrendLag Length: 4 (Automatic - based on SIC, maxlag=7)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -4.126103 0.0156Test critical values: 1% level -4.323979
5% level -3.58062310% level -3.225334
*MacKinnon (1996) one-sided p-values.
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
*MacKinnon (1996) one-sided p-values.
Null Hypothesis: D(LNVALTD) has a unit rootExogenous: ConstantLag Length: 1 (Automatic - based on SIC, maxlag=7)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -4.143116 0.0030Test critical values: 1% level -3.661661
5% level -2.96041110% level -2.619160
*MacKinnon (1996) one-sided p-values.
Null Hypothesis: LNVALTD has a unit rootExogenous: Constant, Linear TrendLag Length: 0 (Automatic - based on SIC, maxlag=7)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -2.647718 0.2633Test critical values: 1% level -4.262735
5% level -3.55297310% level -3.209642
*MacKinnon (1996) one-sided p-values.
Appendix iii.
Null Hypothesis: D(LNVALTD) has a unit root
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Exogenous: Constant, Linear TrendLag Length: 1 (Automatic - based on SIC, maxlag=7)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -4.291613 0.0098Test critical values: 1% level -4.284580
5% level -3.56288210% level -3.215267
*MacKinnon (1996) one-sided p-values.
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.**
None * 0.957532 170.5497 47.85613 0.0000At most 1 * 0.836943 69.46177 29.79707 0.0000At most 2 0.299343 11.42477 15.49471 0.1867At most 3 0.001286 0.041182 3.841466 0.8392
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.**
None * 0.957532 101.0880 27.58434 0.0000At most 1 * 0.836943 58.03699 21.13162 0.0000At most 2 0.299343 11.38359 14.26460 0.1360At most 3 0.001286 0.041182 3.841466 0.8392
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.
51