EFFECT OF MACROECONOMIC VARIABLES ON STOCK RETURNS IN NIGERIA

ABSTRACT

This study sought to examine the effect of macroeconomic variables on stock returns in Nigeria. The specific objectives were to examine the effect of business cycles on stock returns in Nigeria; to analyse the effect of money supply on stock market returns in Nigeria; investigate the effect of inflation rate on stock market return in Nigeria; and determine the effect of interest rate on stock market returns in Nigeria. The study used secondary time series data covering the period 2012 to 2021. The study adopted the Augmented Dickeyfuller unit root test, Johansen co-integration test and the Error Correction modeling technique. The unit root tests revealed that all the variables in the model were difference stationary. The co-integration test showed that a long run relationship existed between stock returns and the set of explanatory macroeconomic variables in the model. The findings of this study showed that business cycles significantly impact on stock returns in Nigeria in the long run. It was also discovered that money supply significantly affects stock returns in Nigeria in the long run. Again, it was revealed that inflation rate plays a significant role in determining Nigerian stock returns in long run. However, in the long run, interest rate did not have any significance relationship with stock market returns in Nigeria. Thus, the study recommended that policy makers should exercise care when drawing up monetary policy involving interest rates and other economic policy because these policies may affect inflation rates, money supply and industrial output and in turn affect yield spread between assets. Since the banking sector is vital to the development of the capital markets, there is the need for a progressive and sound banking system to quicken the development of the financial market. Lastly, government should adopt prudent macroeconomic policies, and integrate the Nigerian Stock Exchange with the international financial system.