STOCK MARKET CAPITALIZATION AND INTEREST RATE IN NIGERIA: A TIME SERIES ANALYSIS
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STOCK MARKET CAPITALIZATION AND INTEREST RATE IN NIGERIA: A TIME SERIES ANALYSIS
ABSTRACT
The relationship between the stock market capitalization rate and the interest rate is investigated in this study. Simple linear regression was used to analyse time series data acquired from the Central Bank of Nigeria (CBN) and the Nigerian Stock Exchange (NSE).
The findings revealed that the current interest rate has a beneficial influence on the stock market capitalization rate. The rate of government development stock has a negative influence on the rate of stock market capitalization, and the rate of prevailing interest has a negative influence on the rate of government development stock.
It was therefore suggested that the operators of the Nigerian capital market enhance the degree of knowledge so that investors are aware of what is going on in the market.
INTRODUCTION
CHAPTER ONE
1.1 BACKGROUND OF THE STUDY
It is well understood that investments that encourage economic growth and development necessitate long-term finance, or money that is longer than the time frame for which most savers are willing to devote their funds. A capital market is a group of financial entities that are set up to make medium and long-term loans.
Investors give long-term cash in order to secure long-term financial assets offered by borrowers. Government securities and business bonds are also traded in this market. The capital market is divided into two (2) types of markets: primary and secondary.
Nigerian Stock Exchange, Discount Houses, Development Banks, Investment Banks, Building Societies, Stock Broking Firms, Insurance and Pension Organisation quoted firms, the government, individuals, and the Nigerian Stock Exchange (NSE) savings and real investment are thus encouraged through capital market operations.
This is because aggregate savings are channelled into real investment, which enhances the country’s capital stock and thus economic development.
The discount rate used to calculate the present value of future earnings is known as the capitalization rate. It is a major determinant of every stock exchange’s market size. This rate is determined by the forces of demand and supply: interest rates are part of monetary policy.
If the interest rate paid by banks to depositors is raised, more investors will patronise banks, while fewer investors will participate in the capital market. This will result in a drop in capital investment in the economy, lowering economic growth and development.
Thus, the divergence in the setting of interest rates and capital rates by distinct causes must have an impact on the economy’s development and growth.
These influences are the primary issue that this study wants to address. Interest rate fluctuations may prompt investors to visit a bank or purchase government development stock (bonds), so aiding the economy’s development.
1.2 STATEMENT OF THE RESEARCH PROBLEM/QUESTION
This research will aim to provide answers to the following questions.
1. Is there a statistically significant relationship between interest rates and stock market capitalization?
2. Is there a link between the government development stock rate and the stock market capitalization rate?
3. Is there a meaningful relationship between interest rates and government development stock?
1.3 OBJECTIVES OF THE STUDY
This study aims to establish the relationship that exists between the current interest rate, stock market capitalization, and the government development stock rate. The following are the study’s specific objectives:
1. Determine the type of link that exists between the interest rate and the stock market capitalization rate.
2. To conduct a critical examination of the relationship between the government stock rate and the stock market capitalization rate.
3. To investigate the relationship between the interest rate and the government development stock rate.
1.4 SIGNIFICANCE OF THE STUDY
The Nigerian stock market, which is a major organ of our modern socioeconomic system, is characterised by big-scale production that necessitates a large amount of capital.
The study aims to add to the body of knowledge and educate interested and relevant stakeholders about the considerable relationship between interest rates, stock market capitalization rates, and government development stock.
By the completion of this study, it is intended that all stock market participants would understand the significance of current interest rates on stock market capitalization as well as government development stocks.
1.5 STUDY HYPOTHESES
The following hypotheses have been developed and will be investigated in the course of this study to address the research difficulties and concerns described above.
1. H0: There is no positive association between the current interest rate and the stock market capitalization rate.
H1: The stock market capitalization rate and the current interest rate have a positive association.
2. H0: There is no positive association between the rate of stock market capitalisation and the rate of government development stock.
H1: There is a positive association between stock market capitalisation rate and stock market development rate.
3. H0: There is no positive association between the current interest rate and the government development stock rate.
H1: The government stock market capitalisation and the current interest rate have a positive association.
1.6 SCOPE OF THE STUDY
This study applies a time series analysis to investigate the effect of interest rates on other variables such as stock market capitalization rate and government development stock rate from 1999 to 2008 in Nigeria.
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