STOCK MARKET CAPITALIZATION AND INTEREST RATE IN NIGERIA: A TIME SERIES ANALYSIS

CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND OF THE STUDY

It is a known fact that the investment that promote economic growth and development requires long-term funding, or longer than the duration for which most savers are willing to commit their funds. Capital market is a collection of financial institutions set up for the granting of medium and long term loans. Government securities corporate bonds are also traded here in the market, investors provides long-term funds in a bid to secure long term financial assets offered by borrowers. The capital market is made up of two (2) types of market: the primary and secondary market.   The participants in the capital include: Nigerian Stock Exchange, Discount Houses, Development Banks, Investment Banks, Buildings Societies, Stock Broking Firms, Insurance and Pension Organization quoted firms, the government, individuals and the Nigerian Stock Exchange (NSE) savings and real investment is therefore encouraged through the operations of the capital market. This is because aggregate savings are channeled into real investment that increases capital stock and therefore economic growth of the country.

Capitalization rate is the discount rate used to determine the present value of future earnings. It is one of the major determinants of the market size of any stock exchange. The determination of this rate is based on the forces of demand and supply: interest rate is a part of the monetary policy. If interest’s rate paid by banks to depositor is increased, investors will patronize the banks the more and fewer investors will invest on the capital market. This will lead to a decrease in capital investment in the economy and hence economic growth and development will be lowered.

Thus, the disparity in the determination of interest rate and capital rate by different forces must have influence on the development and growth of the economy. These influences constitute the major problem that this study intends to investigate.  The variation in the interest rate might cause investors also to either go to bank or buy government development stock (bond) thereby helping in the development of the economy.

1.2  STATEMENT OF THE RESEARCH PROBLEM/ QUESTION

This research will direct itself towards providing answers to the following questions.

1. Is there any significant relationship between interest rate and stock market capitalization rate?

2. Is there any significant relationship between government development stock rate and stock market capitalization rate?

3. Is there any significant relationship between interest rate and government development stock?   

1.3  OBJECTIVES OF THE STUDY

This research is committed to establishing the relationship that exists between prevailing interest rate, stock market capitalization and government development stock rate. Specifically, the following are the objective of the study:

1. To identify the type of relationship that exists between interest rate and stock market capitalization rate.

2. To critically examine the relationship between government stock rate and stock market capitalization rate 

3. To examine the relationship between interest rate and government development stock rate.

1.4  SIGNIFICANCE OF THE STUDY

The Nigerian stock market constitutes a vital organ of our modern socio-economic system, is characterized by large-scale production requiring huge capital. The study hopes to contribute to the wealth of knowledge and enlighten interested and relevant stakeholder on the significant relationship between interest rate, stock market capitalization rate and government development stock. By the end of this study, it is hoped that all participants in the stock market will appreciate the relevance of prevailing interest rate on stock market capitalization as well as government development stocks.

1.5  HYPOTHESES OF STUDY

For the purpose of resolving the research problems and questions articulated above the following hypotheses are formulated and will be tested in the course of this study.

1. H0: There is no positive relationship between stock market capitalization rate and prevailing interest rate.

  H1: There is a positive relationship between stock market capitalization rate and prevailing interest rate.

2. H0: There is no positive relationship between stock market capitalization rate and government development stock rate.

  H1:  There is positive relationship between stock market capitalization rate and development stock market rate.

3.H0: There is no positive relationship between government development stock rate and prevailing interest rate.

 H1: There is positive relationship between government stock market capitalization and prevailing interest rate.

1.6  SCOPE OF THE STUDY

This study employs a time series analysis to examine the effect of interest rate on other variables such as stock market capitalization rate and government development stock rate obtained from 1999-2008 and from Nigeria.