Stock Price Volatility and Its Effect on the Nigerian Stock Market (1980-2009)

The main thrust of this study was to investigate the relationship between changes in stock prices and the performance of the Nigerian stock market. Two hypotheses were formulated to guide and direct the study. The hypotheses were meant to check the relationship between All shares index and market capitalization, and changes in stock prices and value of shares traded on the Nigerian stock market. Relevant data were collected from the Central Bank of Nigeria statistical bulletin. Data collected were analyzed and tested using the ordinary least squares regression technique. Findings resulting from the test revealed that; there existed a direct relationship between all share index and market capitalization (MCAP). The study also showed that there existed a significant and direct relationship between all share index and the value of shares traded on the Nigerian stock market. Given that the stock market operates in a macroeconomic environment, it became necessary that the environment should be an enabling one (regulating inflation rate and other macroeconomic variables) in order to realize its full potentials.IntroductionNo economic activity operates in a vacuum. Markets react promptly and uncharacteristically to rumours of war, changes in regulatory environment; political climate seen as a negative factor by the business (investing) community; and interest rate variation to general performance of the economy. It is a common trend for stock prices of some quoted companies to rise and fall or fall and rise twice or thrice within a year. The stock prices of quoted companies on the Nigerian Stock Exchange (NSE) are affected either positively or negatively by a number of factors occurring within and without the economic system. According to Corrado and Jordan (2002), some of the factors influencing stock price behaviour included company profits; political factors; and economic performance. Others are inflationary rate; interest rate, Real Gross Domestic Product; and shareholders-level taxes.Investment in stock market is long-term in nature; any development that could affect the stability of the economy usually has serious impact on the stock prices. In recent times, the NSE has consistently lost points and the prices of stocks have experienced sharp decline. The downward trend in the market performance was attributed to varying reasons in line with those stated by Corrado, et al (2002).However, Onagoruwa (2006) was of the view that stocks with history of good performance and fundamental attributes are good to buy at times like this when their prices are down and more affordable because they are most likely to bounce back since they have the capacity to absorb the depression in the market. The injection of new funds through public offer could turn around the fortune of the market because of the expected liquidity. Hence, it is important for investors to get an understanding of the working of stock prices of quoted companies.According to the Central Bank of Nigeria (CBN) Governor, Professor Charles Soludo, investors should not panic at the present downward trends in the market arena. Of interest to them should be, inflation rates, liquidity, and the growth of their investment. In well-developed capital markets, share ownership provides individuals with relatively liquid means of diversifying investment risk. Stock prices, however have a high degree of volatility due to market fluctuations, especially when pressure is being exerted to keep the controlled interest rate closer to market prices, which are more likely to reflect inflation and scarcity of funds.The effect of inflation on stock prices and the performance of the stock market are reflected especially where there is a change in the expected inflation rate. If the earning streams of a company remain unchanged and inflation changes from expected, stock prices will experience a decline. Hence, investors who own stock in such a company will experience negative returns. …