Shaky pillars : are micro and macroeconomic fundamentals enough to explain the strength of the Nigeria Stock Exchange?

Abstract

This work aims to show the relationship between stock pricing and behaviour of the stock market on one hand and micro and macroeconomic fundamentals in the Nigerian economy on the other. The primary data was analyzed using a censored logistic model while the secondary data was modeled using an error correction approach. The long run value of the all share price index in the time series model was obtained using a single equation approach that relates the dependent variable to fundamental values of its core explanatory variables. Two equations were thereafter estimated, the first showing the relationship of this long run all share price index with major indicators in the economy and the second showing the relationship of the actual value of the all share price index with same set (or augmented sets) of indicators. Data from the primary survey indicate that the key drivers of share prices, particularly for the boom period were neither broad macroeconomic indicators (though such factors as inflation rate and macro instability are noted to affect it) nor key indicators of the health of the firm. Prices were clearly shown to be much above levels that could have been determined by firm fundamentals. In contrast, stakeholders see price setting behaviour as dominant in the market aided by weak regulatory capacity of key institutions in charge of the market. From the secondary data, we find that while fundamental values of the ASPI are driven by monetary and relative price variables, actual values are driven by external sector variables and prices. Output was largely insignificant either for fundamental or actual movements in the ASPI.