VOLATILITY AND RISK RETURN
IMPLICATION OF GLOBAL FINANCIAL MELTDOWN FOR THE NIGERIAN STOCK EXCHANGE.
Ifeanyi O. Nwanna
Being a Seminar Paper Presented to the Department of Banking And Finance, Faculty Of Management Sciences, Nnamdi Azikiwe University, Awka in partial fulfillment of the requirements for the award of Doctor of Philosophy(Ph.D) in Banking and Finance
Course Code: Fin 703- Theory and Practice of Money
and Capital Markets
Prof. B.C Osisioma
This study attempts to place in the Nigerian perspective for the period of 1989 and 2008, the role of the stock market in the supply of new funds to the economy. The volatility and risk return implication for the Nigerian Stock Exchange as international portfolio investors withdraw their funds in the face of the global financial meltdown was considered. With the help of the Minitab software and gathering some notable stock market development indicators such as market capitalization, NSE-All share index, New Issues, Consumer Price Index, Inflation rate. Dollar-Naira Exchange rates and GDP figures the relationship between stock market development and New Issues was found to be positive and significant. This finding contrasts with previous studies in this area The costs of raising new funds in the Nigerian Stock market was found to be 6.25% of total amount raised, which is above international best practice.. This study therefore suggests that for a significant increase in the supply of new issues that are necessary for growth in the real sector of the Nigerian economy to be achieved, the focus of policy should be on measures that promote growth and sustain development in the stock market.
The stock market is an economic institution, which promotes efficiency in capital formation and allocation. The stock market enables governments and industry to raise long-term capital for financing new projects, expanding and modernizing industrial/commercial concerns. If capital resources are not provided to those economic areas, especially industries where demand is growing and which are capable of increasing production and productivity, the rate of expansion of the economy will suffer. A unique benefit of the stock market to corporate entities is the provision of long-term, non-debt financial capital. Through the issuance of equity 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 corporate debt-to-equity ratio. The existing literature clearly shows that developed economies had explored the two channels through which resource mobilization affects economic growth and development – money and capital markets ( Demirguc-Kunt and Levine, 1998). This is however, not the case in developing economies where emphasis was placed on money market with little consideration for capital market (Nyong, 1997). With the introduction of structural adjustment programme (SAP) in Nigeria, and the various banking and financial reforms that followed, the country’s stock market has grown very significantly (Soloudo, 2009; Alile, 1996). This is as a result of deregulation of the financial sector and the privatization exercises, which exposed investors and companies to the significance of the stock market. Equity financing became one of the cheapest and most flexible sources of finance from the capital market and has remained a critical element in the sustainable development of the economy (Soloudo, 2008; Okereke-Onyiuke, 2000). Though stock market is growing it is however characterized by complexities. The complexities arise from trends in globalization and increased variety of new instruments being traded: equity options, derivatives of various...
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