ABSTRACT
The
study investigated the relationship between crude oil price, exchange rate and
sectoral stock prices in Nigeria from 2009 to 2016, using quarterly data
collected from the Central Bank of Nigeria (CBN) and Nigeria Stock Exchange.
Indices of the Nigeria stock exchange for three sectors (NSE Banking Sector,
NSE Consumer goods and NSE Oil & Gas) were considered as dependent variables,
which led to the specification of three models for the study.
The study implemented unit root with and
without structural breaks to determine the order of integration and further
applied a nonlinear ARDL (NARDL) which is an asymmetric extension of the standard
co-integration test and the standard ARDL. The NARDL was applied to determine
asymmetric effect of crude oil price shocks on stock prices.
Findings from the analysis indicated the
presence of long-run co-integration in most cases and that positive and
negative oil price shocks have differential effects on stock prices across
sectors. Further, positive oil price shocks have greater impact on share prices
in the banking and oil & gas sectors than negative oil price shocks of the
same magnitude. Oil price shocks completely transmitted to the sectors, except
consumer goods sector.
The
study concluded that there should be close monitoring of the banking and oil
& gas sectors as well as appropriate policy actions to curtail systematic
risk in the banking industry.
CHAPTER
ONE
INTRODUCTION
1.1
Background
to the Study
Nigerian
economy has relied heavily on importation of goods from foreign countries and
has depended on crude oil generated revenue for over three decades. Crude oil revenue
is the largest contributor to the Gross Domestic Product (GDP) in Nigeria, (CBN,
2015). The Nigerian government makes use of the international crude oil price
as a benchmark price in budgetary preparations in the country. This implies
that an oil exporting economy will experience boom when there is an increase in
crude oil production and the crude oil market price exceeds the benchmark price
set by government while the economy may some form of recession or sluggishness
in the economy when the price falls below benchmark price Clifford K. (March 10, 2017).
Such frictions may reflect in the form of inability of the government to fund
the national budgets due to a reduction in foreign exchange earnings (Adaramola
2015) the recent situation in Nigeria during the periods that recorded low
crude oil price, many states in the country were unable to pay salaries,
exchange rate depreciated further and many people lost their jobs (Alechenu
2016, March 25).
Historical
data collected from the CBN has shown that crude oil price began falling
persistently since November 2013 and got to its lowest price in February 2016.
The implications of this fall price reflected in the form of decline in revenue
in Nigeria and as a result, most states could not afford to pay salaries and
reduction in accumulated foreign exchange which is to be used for importation
of consumer and capital goodsGabriel
(June 15, 2015). This scarcity of foreign exchange led
to a further depreciation in the National currency (Alechenu J. 2016, March 25).The
Naira was fast approaching N500 to $1 and finally exceeded N500 to $1 in the
parallel market between January and February 2017 (NAN, 2017, February 3). The
naira was also traded for N617 and N527 for one Pound Sterling and Euro
respectively. However, the naira is currently appreciating in the parallel
market in Nigeria (NAN, 2017, February 3). Thus, this suggests that the
implications of crude oil volatility and exchange rate volatility on the
economy cannot be overlooked. This study investigated how crude oil price
shocks and exchange rate affectssectoral stock prices in Nigeria.
The
stock market is a place where most elements that gear the development of a
nation’s economy operate with one another and it plays a prominent role in
shaping a country’s economic and political development. It plays a major role
in financial intermediation in both developed and developing countries by
channeling idle funds from surplus to deficit units in the economy. This is
because as the economy of a nation develops, more resources are needed to meet
the need for its rapid expansion. The stock market serves as a channel through
which savings are mobilized and efficiently allocated to achieve economic
growth (Alile, 1984). Long term capital resources are pooled through issuing of
shares and stocks by industries in dire need of finance for expansion purposes.
Thus, the overall development of the economy is a function of how well the
stock market performs.This is why empirical evidences from developed economies
as well as some emerging markets have proved that the development of the stock
market is sacrosanct to economic growth (Asaolu & Ogunmuyiwa, 2010).
Stock
prices are generally believed to be determined by some fundamental
macroeconomic variables such as interest rates, money supply inflation,
exchange rate and Gross Domestic Product (GDP), hence, Change in the prices of
stock can be linked to some macroeconomic behavior of both advanced countries
and developing countries (Muradoglu, 2000). The relationship between exchange
rate and stock price could be negative or positive, depending on whether the
economy is export-or import-dominant, respectively. For an export dominant
country, an increase in exchange rate would result in a decline in the
country’s export competitiveness, thus has a negative impact on the domestic
stock prices. For an import dominant country, on the other hand, an
appreciation of exchange rate would reduce input costs, thus generates a
positive effect on the domestic stock prices (Narayan & Narayan, 2010).
Variations
in exchange rates affect the competitiveness of firms who borrow in foreign
currencies to finance their operations and this is because changes in exchange
rates affect the earnings as well as its cost of funds and hence its stock
prices (Dornbusch & Fischer, 1980). An appreciation of the local currency
makes exports less attractive and thus bring about a reduction in foreign
demand and the total revenues for the firms and thus, bringing about a fall in
the value of the exporting firm and its stock prices (Gavin, 1989).
The
relationship between stock prices and macroeconomic variables is well
illustrated by the theoretical stock valuation models which shows that the
current prices of any equity share is approximately equal to the present value
of all future cash flows discounted; hence, any macroeconomic variable that
affect the cash flow and the required rate of return will certainly have
significant effect on the share value as well (Adaramola, 2012). Hence, since
macroeconomic fundamentals such as exchange rate and oil price volatilities can
affect the cash flow or required rate of return, then it will equally have an
effect on stock prices. Changes
in exchange rates can significantly affect the competitiveness of firms as
variations in exchange rate affects the value of the earnings as well as the
cost of its funds and this is because many companies borrow in foreign
currencies to finance their operations and hence its stock price (Dornbusch & Fischer, 1980).
Oil prices can act as the
transmission channel through which the real exchange rate affects the stock
market and as such, inferences about the long-run relationship of variables and
the causality structure may not reflect the true impact of exchange rate on
stock price without an inclusion of oil price as an explanatory
variable(Narayan & Narayan, 2010). When Oil is considered as an input to
production process, an increase in oil price will give rise to increased
production costs which causes productivity to decline (Narayan & Narayan, 2010).
There
is large number of available literature that studied relationship between crude
oil price, exchange rate and stock prices in Nigeria and some of which includes
Adaramola, (2012); Adebiyi,
Adenuga, Abang and Omanukwe (2014); Akinlo,
(2014);Akomafe, Jonathan and Danladi, (2014); Abdulrasheed, (2014); Asaolu and
Ilo (2012); Augustine, (2015) and Osuala & Ebieri, (2015).The findings of
these studies were mixed. Abdulrasheed, (2014); Asaolu & Ilo, (2012);
Augustine, (2015) showed that the relationship between Oil price, Exchange rate
and stock price is positive while few others including Akinlo, (2014); Osuala
and Ebieri, (2015) found a negative relationship between oil price and stock
prices in Nigeria. Regarding causality, Adaramola, (2012) found a
unidirectional causality from oil to stock market. Akomafe, et. al, (2014)
found evidence of unidirectional causality from oil price to three different
industrial sectors (banking sector stocks, construction sector stocks and oil
& gas sector stock). Abdulrasheed, (2013) found no evidence of causality
from exchange rate to stock price while Akinlo, (2014) showed that the
causality flows from stock market to exchange rate not the reverse. The observed mixed finding implies the need
for further investigations in to the nature of relationship and the direction
of relationship between exchange rate, oil price and stock prices in Nigeria.
This study has its mainfocused in understanding the nature of the relationship
between oil price, exchange rate and sectoral stock price indices(NSE Banking index;
NSE Consumer goods index and NSE Oil & Gas index) in Nigeria.
1.2
Statement
of the Problem
The
source of government revenue in Nigeria has been from the oil sector for more
than three decades, using the price of the product in international market as
the bench mark price. Performance of successive government’s budget in Nigeria
has based its budgetary preparations mostly on earnings from oil; hence the
performance of the economy often becomes sensitive to the variations in crude
oil production and its prices to provide the needed foreign currencies needed
to support imports. In recent years, oil prices have not been stable thus
having adverse effects on budgetary planning in Nigeria with serious
consequences on the overall economy (Asaolu & Ilo, 2012). The over reliance
of the economy on importation of virtually all goods including refined oil
despite being the 5th largest exporter of crude oil in the world,
has made the Nigerian economy more vulnerable to exchange rate volatility,
despite the expectations that depreciating exchange rate is expected to boost
exports (Dornbusch & Fischer, 1980). However, there is need to study the
implications of depreciating exchange rate on stock prices in an imports
dependent country like Nigeria.
Exchange
rate and oil price are two strong prices and their volatility can transmit
either negative or positive effects on stock market prices in Nigeria
(Adaramola, 2012). Their volatilities threaten smooth operation of business and
the economy and as such can affect the expected future cash flow of companies listed
on the stock exchange market and this will reduce the value of the firm and
hence the share price of the listed company (Asaolu and Ilo 2012). International
Crude oil price fluctuations are observed to be accompanied by some variations
in the general stock market performance, measured by the All Shares Index
(ASI). In January 1986, crude oil price was as low as 25.62 dollar per barrel
(dpb) while stock price (ASI) was 111.3. Over the years ASI has increased
significantly with upward fluctuations in oil price. In November 2000 ASI has
increased to 7, 164.4 while the oil price has increased to 34.26 and by
December 2000 oil price has declined to 28.4 dpb while the ASI rises to
8,111.0. The year 2007 and especially 2008 experienced significant boom with high
ASI stock market values. The February 2008 recorded the highest stock index
65,652.4 with a corresponding Oil price of 95.35 dpb. June 2008 has the highest
oil price 134. 02 dpb considering from years between 1983-2016, with
corresponding ASI of 55, 949.0 and after this price oil price began to
fluctuate downward with its last highest value of 105 dpb in June 2014 the oil
price depreciation is persistent and the lowest oil price 30.62 recorded in
February 2016 while the ASI falls significantly to 24, 570.73. As at august
2016, oil price has risen to 44.8 dpb and ASI 27, 599.03 (CBN, 2010).
Fromthe
foregoing there seems to be to be inconsistent relationship between oil price
and stock price, in Nigeria is mixed. The data shows periods where crude oil
price increases are accompanied by increases in stock prices, implying a
positive relationship while at some other period a negative relationship is
observed and this observation corresponds to the mixed findings of Adaramola,
(2012); Adebiyi et. al, (2014) Akinlo,
(2014);Akomafe, Jonathan & Danladi, (2014); Abdulrasheed, (2014); Asaolu &
Ilo, (2012); Augustine, (2015) and Osuala & Ebieri, (2015). Thus, the
essence of this study is to carry out further empirical investigation because
of the to mix findings that exist regarding the effect of crude oil price,
exchange rate and sectoral stock prices in Nigeria.
1.3 Objective of the Study
The
main objective of this study is to empirically determine the effect of crude
oil price shocks on sector stock prices in Nigeria. The specific objectives are
to:
1.
determine the effect of oil price shocks
on sectoral stock price indices(NSE Banking sectorindex; NSE Consumer goods sector
index and NSE Oil & Gas sector index) in Nigeria;
2.
determine the presence of long-run
co-integration relationship among oil price, exchange rate and sectoral stock price
indices((NSE Banking sectorindex; NSE Consumer goods sector index and NSE Oil
& Gas sector index) in Nigeria;
3.
determine the presence of asymmetry in
crude oil price and their effects on sectoral stock prices indices(NSE Banking
sectorindex; NSE Consumer goods sector index and NSE Oil & Gas sector index)
in Nigeria;and
4.
determine the effect of exchange rate on
sectoral stock price indices(NSE Banking sectorindex; NSE Consumer goods sector
index and NSE Oil & Gas sector index) in Nigeria;
1.4
Research
Questions
This study answered the
following research questions:
1.
What is the effect of oil price shocks
on sectoral stock priceindices(NSE Banking sectorindex; NSE Consumer goods sector
index and NSE Oil & Gas sector index)in Nigeria?
2.
Is there long-run co-integration
relationship among oil price, exchange rate and sectoral stock priceindices(NSE
Banking sectorindex; NSE Consumer goods sector index and NSE Oil & Gas sector
index) in Nigeria?
3.
Is there asymmetry between crude oil
price and sectoral stock priceindices(NSE Banking sectorindex; NSE Consumer
goods sector index and NSE Oil & Gas sector index) in Nigeria?
4.
What is the effect of exchange rate on
sectoral stock price (NSE Banking sectorindex; NSE Consumer goods sector index
and NSE Oil & Gas sector index) in Nigeria?
1.5
Hypotheses
Based on the
objectives, the following hypotheses were germane:
Ho1: Crude oil price has no statistical impact on sectoral
stock priceindices(NSE Banking
Sectorindex; NSE Consumer goods sector
index and NSE Oil & Gas sector index)in
Nigeria.
Ho2:There
is no long-run co-integration relationship among crude oil price, exchange rate
and sectoral stock indices(NSE Banking sectorindex; NSE Consumer goods sector
index and NSE Oil & Gas sector index)in Nigeria
Ho3: There is no Asymmetry betweenoil price
shocks and sectoral stock indices(NSE Banking sectorindex; NSE Consumer goods sector
index and NSE Oil & Gas sector index)in Nigeria
Ho4: Exchange rate has no statistical impact on
sectoral stock price indices(NSE Banking sectorindex; NSE Consumer goods sector
index and NSE Oil & Gas sector index)in Nigeria.
The null hypotheses
were tested at 5% level of significance.
1.6
Scope
of the Study
This
study examined the effect of exchange rate volatility and crude oil price shocks
on sectoral stock price in Nigeria Stock Exchange using quarterly data from
2009.Q1 –2016.Q4.Three sectoral indices out of seven (7) stock indices of the
Nigeria stock exchange. Exchange rate quarterly data is based on the average.
The
three sectoral indices included in the study are banking, consumer goods, oil
& gas Sectoral index from the Nigeria Stock Exchange Index. The All share
index, NSE 30 Index, Lotus Islamic banking index and NSE Industrial goods were
excluded from the study because the NSE 30 and ASI are aggregated stock prices
of the stock market however; this study was primarily interested in disaggregated
stock price and not aggregated stock prices in Nigeria. The lotus Islamic
banking index is also not included because Islamic banking is a recent
development in Nigeria and as such data for this variable is not available. NSE
Industrial goods are also excluded from the analysis because the data is not
available from 2009 which is period shorter than the other variables available.
NSE Industrial goods is only available from 2012-2016 which implies lesser
observation than the other 2 sectors.
1.7
Significance
of the Study
It
is important to know the effects of exchange rate, oil price on sectoral stock
prices in Nigeria. Findings of the study would be helpful to government,
investors and other stakeholders to understand how stock prices of different
sectoral share prices of the Nigerian stock exchange would respond to
variations in exchange rate and oil price volatility. This study is essential
and helpful in giving better explanations to stock market behavior induced by
oil price shocks and exchange rate. Exchange rate deterioration in Nigeria has
been persistent for over 3 decades can have adverse effects on an import
dependent nation. Similarly over dependence of the economy on crude oil revenue
could have adverse effect on the economy when there is a significant increase
in oil price since oil is used as an input to most businesses to Nigeria.
Findings
from this study is helpful to Government in policy making and also to
management of companies in banking sector, consumer goods sector and oil and
gas sector to understand the implications of oil price shocks to their
cash-flow, which equally impact on the share prices of the sectors to enable
them properly hedge against risk emanating from crude oil price and exchange
rate shocks. It would provide basis for government to make policies that would
maintain stable oil price and supply to avoid volatility generated by shocks in
the economy.
1.8
Justification
for the Study
The
exchange rate is an important relative price as it has influences on the
external competitiveness of domestic goods. Given the import dependent nature
of the Nigerian industrial sector, the continued depreciation of the naira
exchange rate vis-Ã -vis the currencies of other major trading partners, means
that more resource would be needed to increase domestic output. A depreciating
exchange rate in the absence of domestic sources for input and inadequate
infrastructure will raise the cost of production, which will in turn make
locally produced goods less competitive compared to the imported goods, thus, reversing
the benefit of cheaper exports expected from depreciation of any currency. This
is because share prices are approximately the present value of all discounted
future cash flows which can be affected by macroeconomic variables like
exchange rate and oil price volatility.
There
is limited literature that studied sector effects of crude oil volatility and
exchange rate volatility on sector stock prices in Nigeria. Akomolafe,
Jonathan, Danaladi, (2014) and Ohiorenoya, Iwedi and Igbanibo, (2015) did a sectoral
analysis of stock prices covering 3 sectors listed in the Nigeria Stock
Exchange but the study did not include exchange rate as an independent
variable. The study also did not consider oil price shocks.
Many
others including Osuala and Ebieri, (2015); Asaolu and Ilo, (2012) are similar
to this study in terms of variables but they did not study disaggregate stock
prices by sectors, they rather studied aggregated stock prices using All Share
Index and how it responds to variations in exchange rate and crude oil but did
not put volatility into consideration; they did not consider structural breaks
and nonlinearity that may be present in variables which can undermine the
predictive power of the model as stated by Dick and Panchenko, (2006) and can
reduce the power of the model to reject the null hypothesis when structural
break is present in the time series data.
The
findings of Hiemstra and Jones, (1994) Hamilton (1996), Ciner, (2001) showed
that crude oil price changes have nonlinear causal influence on stock market
returns and thus, there is need for a non-parametric model that can explain
relationship between crude oil price, exchange rate and stock prices in
Nigeria. Nonlinear ARDL (NARDL) was implemented in this study to investigate
nonlinear dependence between oil price and stock prices in Nigeria.
Several
studies have applied the standard co-integration modeling and granger
causality, error correction model and granger causality by means of standard
times series techniques. Although these techniques enable evaluation of their
long-run as well as their short-run interactions, however, they were built
based on the presumption of symmetric relations between oil price and stock
prices and such techniques are not adequate to capture potential asymmetries in
the oil price dynamics. It is based on this Shin, Greenwood-Nimmo, (2011)
advanced a nonlinear ARDL (NARDL) as an asymmetric extension to the well known
ARDL model of Pasaran and Shin, (1999) and Pasaran et al. (2001) to capture
long-run and short-run asymmetries in the variable of interest. This NARDL
approach to co-integration can accommodate structural breaks in time series and
just like the ARDL approach; NARDL is applicable to studies with small or
finite sample size (Pasaran and Shin (2001). It applicable on series with less
than 30 observations which makes the application of NARDL to this study
adequate and appropriate since the variables in this study have less than 30
observations.
Thus, this study applied the recently
developed NARDL developed by Shin et al (2011) to account for short-run and
long-run asymmetries between crude oil price, and sectoral stock prices in
Nigeria.
1.9 Operational Definition of Terms
Exchange
Rate: This is the
price of a nation’s currency in terms of another currency.
Volatility:
volatility is the degree of variation of a trading price series over time. It
is a rate at which the price of a security increases or decreases for a given
set of returns. They are generated by with and outside the economy.
Crude Oil Price:
The price of oil in the international market. It is generally refers to the
spot price of a barrel of benchmark crude oil—a reference price for buyers and
sellers of crude oil such as West Texas Intermediate (WTI), Brent etc. In this
study Brent price for oil per barrel is used.
All Share Index
(ASI): The All-Share Index tracks the general market
movement of all listed equities on the Exchange, including those listed on the
Alternative Securities Market (ASeM), regardless of capitalization.
NSE Oil & Gas Index:
Designed to provide an investable benchmark to capture the performance of the
oil and gas sector, this index comprises the most capitalized and liquid
companies in oil and gas marketing. The index is based on the market
capitalization methodology.
NSE
Consumer Goods: Designed to provide an investable
benchmark to capture the performance of the consumer goods sectors, this index
comprises the most capitalized and liquid companies in food, beverage and
tobacco.
NSE Banking Index: Designed to provide
an investable benchmark to capture the performance of the banking sector, this
index comprises the most capitalized and liquid companies in banking. ================================================================
Item Type: Postgraduate Material | Attribute: 198 pages | Chapters: 1-5
Format: MS Word | Price: N3,000 | Delivery: Within 30Mins.
================================================================
No comments:
Post a Comment