Macroeconomic Variables and Stock Market Prices in Nigeria: A Cointegration and Vector Error Correction Model Tests

This study was undertaken to evaluate the effect of macroeconomic variables on stock market prices using annual time series datasets for Nigeria for the period 1980-2013. The data were analyzed with the application of OLS regression technique. The study employs Johansen cointegration and VECM based on arbitrage pricing theory (APT) of Ross (1976). The macroeconomic variables utilized were gross domestic product (GDP) and broad money supply (M2). The results of the findings indicate that Nigerian stock market prices have long-run relationship with macroeconomic variables. However, GDP has significant long-run negative effect on stock prices contrary to a priori expectation that GDP has significant positive effect on stock prices. But M2 has significant long-run positive effect on stock prices, the result being consistent with a priori expectation. Again, there is unidirectional causal effect between GDP and stock prices with direction running from stock prices to GDP. Whereas there is no causal effect between stock prices and broad money supply. However, in the short-run both GDP and M2 have positive but insignificant effect on stock prices in Nigeria. This result suggests that stock market in Nigeria is informational inefficient. It shows that predicting stock prices based on macroeconomic factors is difficult.