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SECURITIES AND EXCHANGE MARKET AND THE NIGERIAN ECONOMY; ADAPTIVE EXPECTATION HPOTHESIS



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SECURITIES AND EXCHANGE MARKET AND THE NIGERIAN ECONOMY; ADAPTIVE EXPECTATION HPOTHESIS



Abstract:

The need to critically analyze the securities and exchange market and the nigerian economy; adaptive expectation hpothesis 1990 - 2015. The results indicate that the stock market indeed contributes to economic growth. The Nigerian Stock Exchange has not been having the best of times as an aftermath of the global financial crisis after an unprecedented surge in returns on investment which has resulted in a con­tinuous downturn in market capitalization

The main objectives of the Nigerian Stock Exchange as enunciated in the Memorandum of Association of the company is to create an appropriate mechanism for capital formation and provide efficient allocation of resources among competing alternatives. It is also ex­pected to provide special financing strategies for projects with long term gestation periods. In addition, it helps to maintain discipline in the capital market as far as the participants and the investors are concerned and as such, assist to broaden the share ownership in the market by providing the enabling envi­ronment and to provide and maintain fair prices for securities. The overriding objec­tive of any financial system is the provision of a conducive atmosphere for the transfer of funds from the surplus sector of the econo­my to the deficit sector. The Capital Market, in the process of carrying out its function is faced with many challenges such as the effect of economic trends, financial restructuring and reforms by government, industrializa­tion, and technology etc. the Capital Market is thereby required to adapt to the constantly changing trends in the economy.

 

 

 

 

 

 

The market in Nigeria has been de­scribed as being shallow; this is due mainly to the market float that is very small and is measured by the ratio of securities in the market to the total listed securities outstand­ing. The challenge that lies ahead is to be able to increase and retain as many of our domes­tic individual and institutional investors as possible and simultaneously attract foreign ones to the Nigerian Capital Market. This can be achieved by being dynamic, innovative, and having an open mind so that new ideas can be absorbed and put productively in use. The market mist be in a position to provide a spectrum of investment alternatives, new trading instruments with which investors can hedge their risk, as well as an environ­ment which is honest, has sufficient struc­tures and where policies are flexible enough to accommodate different investment needs.

The Capital market has also been char­acterized by a number of market failures, one of which is asymmetric information, a situation in which one party to a transac­tion has less information than the other par­ty. The pervasiveness of this phenomenon greatly undermines the efficiency of finan­cial markets as mechanisms for allocating resources. Because geography and cultural distance complicate the acquisition informa­tion, asymmetric information is particularly prevalent internationally. While the revolu­tion in information asymmetric are lessened but not eliminated, therefore they are prone to the sharp investor reactions, unpredict­able market movements and financial crisis that can occur when information is incom­plete and financial markets behave errati­cally (Eichengreen and Musa 1998). Thus, in the absence of complete information, inves­tors tend to rush in and out of the markets on rumour. The purpose of the study is to criti­cally examine and evaluate the impact of the Capital Market on the Nigerian economy ef­forts would be made to identify and appraise the strengths and weaknesses of the capital Market and attempts made to remedy such. This would be examined from the past, pres­ent and forecast into the future. The main ob­jective of this work is to examine the impact of the capital market on the Nigerian econo­my. The specific objectives are to assess the role of capital market in economic develop­ment and to ascertain the success achieved through a viable working model for the Nigerian economy,

Some of the relevant questions in this work are as follows:

                What is the impact of the Capital Market and the Stock Exchange on the Nigerian Economy?

                What is the proposed working model for the Nigerian Economy?

                What is the relationship between the Capital Market and the Stock Exchange?

                Does the performance of the Stock market affect the Nigerian Economy?

                Why has the capital market been un­able to mobilize domestic and foreign funds?

                Does the Capital Market and Stock Exchange influence the Nigerian Economy?

What measures should be taken in or­der to improve the Nigerian Capital Market in

 

CHAPTER ONE
INTRODUCTION
1.1      BACKGROUND TO THE STUDY
A stable securities exchange market plays a major role in the growth and development of any country. This raises the need to examine the Nigerian securities exchange market. The country has a growth domestic product (GDP) of about $510 billion. However, most recently, the country has been experiencing reduction in growth in the securities exchange market and in its GDP. Gross domestic product indicators also show that Nigerian securities exchange and the economy are experiencing slow growth. Due to the bearish mode of the securitiesexchange market, investors have developed a pessimistic attitude towards the market (Olusegun, Oluwatoyin, Fagbeminiyi, 2011).
The market has been performing poorly in the region due to withdrawal of investors in the market. Despite the fall of the Nigerian securities exchange market, the debt to GDP ratio of the country is still at 19.39 percent while other countries maintain their GDP at fifty-six percent. Additionally, the adaptive expectation hypothesis has a great contribution in the fall of the capital market. Adaptive expectation hypothesis states that recent information determines the investors’decision; therefore, investors will expect inflation to be the same as the previous year (In John, In Makhija & In Ferris, 2015). The financial system of any society is the framework within which capital formation takes place. 
According to Odife (1994), it is the framework within which the savings of some members of the society are made available to other members of the society. Put differently, it is the arrangement or mechanism by which the savings surplus units of the economy transfer their resources to the borrowing deficit units for the purpose of enhancing economic growth (Okereke – Onyiuke, 2009).  The financial system is made up of two major markets.  These are the money market and the capital market.  According to Elakama (2009), the two markets are at the heart of the financial system. The money market is a type of market where short term funds and securities such as treasury bills, inter-bank deposits, Banker’s acceptance, certificate of deposits etc whose tenor are usually shorter than or equal to a year are bought and sold. 
In other words, it is a market where short term capital is sourced.  The capital market on the other hand is a type of market where long term debt instruments whose tenor exceeds a year are traded.  According to Sulaiman (1999), it is a network of interrelated institutions governed by operational guidelines, which permit the sale of equity and long term debt.  Furthermore, Al-Faki (2006) describes the capital market as a network of specialized financial institutions, series of mechanism, processes and infrastructure that, in various ways, facilitate the bringing together of suppliers of medium to long term capital for investment in socio-economic development projects.  Instruments traded in the capital market include equities, debts, government bonds, corporate bonds, preference shares, debentures, rights etc. Within the broad classification of the capital market is the stock market, which operates as the rallying point for the overall activities in the capital market.  According to Alile and Anao (1984), the stock market is the pivot around which every activity in the capital market revolves.  Its follows therefore that without the facilities provided by the stock market, it is doubtful if the capital market can efficiently perform its expected role of resource mobilization (Ologunde, Elumilade and Asaolu, 2006). 
It is in the light of the above that the stock market is considered a vital element in the mobilization and allocation of resources in any modern economy. The stock market also known as the stock exchange or equity market performs some functions that promote the growth of the economy (Osinubi, 2004).  Firstly, as an economic institution, the stock market promotes efficiency in capital formation and allocation.  Secondly, the stock market serves as a veritable tool in the mobilization and allocation of savings among competing uses which are critical to growth of the economy.  Thirdly it enables governments and industry to raise long term fund for financing new projects and expanding and modernizing industrial/commercial concerns, thereby increasing the quantity and quality of investment.  Fourthly, by performing its function of allocating capital efficiently, the stock market, as it mobilize savings concurrently allocates a larger proportion of it to the firms with relatively high prospects as indicated by their rate of returns and level of risk.  The importance of this function is that capital resources are channeled by the mechanism of the forces of demand and supply to those firms with relatively high and increasing productivity, thus enhancing economic expansion and growth.  In recognition of the importance of the stock market in economic development, many developing countries have launched stock exchanges during the past few decades. This explains the drive toward the establishment of stock exchanges in African countries especially during the past two decades, with new stock markets established in Ghana, Malawi, Swaziland, Uganda and Zambia.  Prior to 1989, there were just eight stock markets in Africa, of which three were in North Africa and five in Sub-Sahara Africa.  At present, more than 50% of the fifty four African countries operate stock exchanges, accounting for over twenty-two stock exchanges in Africa (Komo, 2008)

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SECURITIES AND EXCHANGE MARKET AND THE NIGERIAN ECONOMY; ADAPTIVE EXPECTATION HPOTHESIS


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The need to critically analyze the securities and exchange market and the nigerian economy; adaptive expectation hpothesis 1990 - 2015. The results indicate that the stock market indeed contributes to economic growth. The Nigerian Stock Exchange has not been having the best of times as an aftermath of the global financial crisis after an unprecedented surge in returns on investment which has resulted in a con­tinuous downturn in market capitalization The main objectives of the Nigerian Stock Exchange as enunciated in the Memorandum of Association of the company is to create an appropriate mechanism for capital formation and provide efficient allocation of resources among competing alternatives. It is also ex­pected to provide special financing strategies for projects with long term gestation periods. In addition, it helps to maintain discipline in the capital market as far as the participants and the investors are concerned and as such, assist to broaden the share ownership in the market by providing the enabling envi­ronment and to provide and maintain fair prices for securities. The overriding objec­tive of any financial system is the provision of a conducive atmosphere for the transfer of funds from the surplus sector of the econo­my to the deficit sector. The Capital Market, in the process of carrying out its function is faced with many challenges such as the effect of economic trends, financial restructuring and reforms by government, industrializa­tion, and technology .. Click here for more

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