INFLATION RATE AND STOCK MARKET PRICES
ABSTRACT
In this study, we set out to investigate in an empirical pattern, the effect of inflation on stock prices in Nigeria. The efficiency of a stock market, among other things, depends on its ability to process external information and not allow it to distort market prices. In order to obtain the dynamic properties of the analysis, time series estimation techniques were applied in the study. Essentially, the Granger Causality testing and the Cointegration and Error Correction Methods were employed in the analysis. Annual time series data was used in the estimation.
    The results from the empirical analysis show that generally, stock prices respond in some way or the other to macroeconomic variables. More specifically, the findings indicate that price level or inflation has a significant negative effect on stock price movement in Nigeria in the short run; that inflation does not have a significant impact on stock prices in the long run. After all the adjustments have been made following an initial change in prices, stock prices no longer respond to inflation levels in the country. Money supply has a negative effect on stock price movements in the short run and in the long run. Thus as money supply grows, stock prices tend to fall. This suggests that individuals and investors consider the stock market as an alternative source of funding. As the money base expands, the alternative source of funds becomes more plausible and so, individuals and investors begin to reduce their participation in the market. The naira exchange rate also has a strong positive impact on the stock price movement. In other words, naira depreciation tends to stimulate stock prices. Thus, stock market liquidity only has a long term effect on stock prices in Nigeria. The short run effect is insignificant while the long run effect is positive.
TABLE OF CONTENT
CHAPTER ONE: INTRODUCTION
1.1    Background of the Study                   
1.2    Statement of Research Problem               
1.3    Research Question                        
1.4    Objectives of the Study                       
1.5    Statement of Research Hypotheses           
1.6    Scope of the Study                       
1.7    Significance of the Study                   
CHAPTER TWO: LITERATURE REVIEW
2.1    Introduction                           
2.2    Relationship between Interest Rate and Stock Price                                      
2.3    Relationship between Money Supply and
Stock Price                                    
2.4    Relationship between Inflation and Stock Price   
2.5    Relationship between Exchange Rate and
Stock Price                               
CHAPTER THREE: METHODOLOGY OF THE STUDY
3.1    Introduction                            
3.2     Model Specification                       
3.3    Source of Data                           
CHAPTER FOUR: EMPIRICAL ANALYSIS
4.1    Introduction                            
4.2    The Short - Run Dynamic Model                
4.3     The Long Run Relationships               
CHAPTER FIVE: SUMMARY, RECOMMENDATIONS AND CONCLUSION
5.1    Summary of Findings                        
5.2    Recommendations                       
5.3    Conclusion                            
    Bibliography                            
    Appendix                                
 CHAPTER ONE
INTRODUCTION
1.1    BACKGROUND TO THE STUDY
    Interest rate is one of the important macro-economic variables, which is directly related to economic growth and stock market price in specific. The direction of interest rate movement is of primary importance to the stock market. Stock investors watch for signs from the economy that may suggest which way interest rates will more in the future in order to guide their investment in the stock market. Basically, interest rates control the flow of money through the economy. The prices of stock in the stock market. When interest rates are low, consumer spending increased and business can borrow money for expansion, buy more stocks and for other needs at more affordable rates.
    According to Mahmudul and Gazi (2012), interest rate is considered as the cost of capital, the price paid for the use of money for a period of time. From the point of view of borrower, interest rate is the cost of borrowing money (borrowing rate). From a lender’s point of view, interest late is the fee charged for lending money (lending rate). If the interest rate paid by banks to depositors increases there is the tendency that people will switch their capital from share market to bank, this will then lead to decrease in the demand of shares (stock) and to decrease the price of share and vice versa (Mahmudul and Gazi, 2012). On the other way, when rate of interest paid by banks to depositor increases, the lending interest rate also increases and then decrease the investments in the economy which is also another rationale of decreasing share (stock) price and vice versa. Thus, theoretically, there is inverse relationship between share price and interest rate (Mohamed and Abdelkader, 2011). Against this backdrop, this study seeks to examine the impact of interest rates on stock market price.
1.2    STATEMENT OF RESEARCH PROBLEM
    The relationship between interest rates and stock market price has received consideration attention in literatures. Study on the relationship between interest rate and stock market price has rather remained mixed. Fama (1981) found a positive relationship between interest rates and the stock market. Mahmudul and Gazi (2012) found a negative relationship given the inclusion of some macro economic variables such as inflation rate. The increase or decrease in stock market price is not only occasioned in the movement of interest rate. There is therefore, the need to superficially established how interest rate influence stock market price while taking into account the presence of some macro-economic variables which could positively influence the stock market price or distort it. In the light of the above views, the following specific research question are raised. 
1.3    RESEARCH QUESTIONS
a)         What is the relationship between stock price and inflation rate in Nigeria.
b)     Does interest rate have a significant relationship with the stock price?
c)     Is there any relationship between exchange rate and stock price.
d)     What is the relationship between value traded in the stock market to GDP and stock price.  
1.4    OBJECTIVES OF THE STUDY
    The objectives of the study are basically segmented into general and specific objective. The general objective of the study is to examine interest rate and stock market price. However, the specific objective is as follow:
a)    To find if there is a significant relationship between inflation stock market price in Nigeria.
b)    To ascertain to what extent exchange rate impact on stock market price.
c)    To examine the relationship between value traded in stock market and Gross Domestic Product.
d)    To examine the relationship between stock market price and interest rate given the influence of exchange rate as a macro economic variable.
1.5    STATEMENT OF RESEARCH HYPOTHESES
    In order to validate the empirical relationship between interest rate and stock market price, the null hypotheses are proposed as follows.
1.    There is no significant relationship between inflation and stock market price.
2.    There is no significant relationship between value of traded stocks and Gross Domestic Product.
3.    There is significant relationship between stock market price and exchange rate.
1.6    SCOPE OF THE STUDY
    This study examined interest rate and stock market price. The influence of macro economic variables such as inflation rate and exchange rate along side with interest rate will be examined to know how stock market prices are influenced within the Nigerian economy. Thus, the period 1990 -2010 shall be examined critically with a view to making inferences.
1.7    SIGNIFICANCE OF THE STUDY
    This study has much relevance to myriad of parties, which are; the Central Bank of Nigeria. It will find the outcome of this study useful in terms of seeking the reason while the interest rate needs to be evaluated and regulated closely with a view to enhancing investment.
    Investors, both existing and potential investors will find the study very useful to them in  that it will serve as a guide to them in knowing when to invest in the stock market given a prevailing interest rate in the Nigerian economy.
    Future researchers will find the study also relevant in terms of reference materials.
 

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