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Int. j. econ. manag. soc. sci., Vol(4), No (7), July, 2015. pp.


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International Journal of Economy, Management and Social Sciences


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Emerging Stock Markets and Global Economic System:

The Nigeria Experience
Owolabi Adesegun Oluwasanmi *
Department of banking and finance, school of business studies, the Federal Politechnic, Ado - Ekiti, Nigeria.

Owoola R. Ibukun-Falayi
Department of accounting, school of business studies, the Federal Politechnic, Ado - Ekiti, Nigeria.
*Corresponding author:



Stock markets
Global economic system
Nigeria stock markets

This paper investigates the relationship between global economy activities and Nigeria stock market development.
Data for the Nigerian stock exchange market, Central Bank of Nigeria, Security and Exchange Commission,
International Monetary Funds (IMF) of various years were made use of for the period of 10 years, i.e. 2003 to 2013.
The study made use of regression analysis technique (OLS) to analyze the collected data. The study found out those
global economy activities is positively significant to Nigeria stock market development. The study recommends
that the Nigerian stock market should respond positively to the trend of global economy development.



Financial market, especially stork market, have grown considerably in developed and developing countries over the last two decades several
factors have aided in their growth, importantly improved macroeconomic fundamentals, such as more monetary stability and higher economic
growth general economic and specific stock markets reform, including privatization of state-owned enterprises, financial liberalization and an
improved institutional framework for investors, have further encouraged capital markets development.
Financial globalization has also advance in the last two decades with increased cross-border capital flows, tighter links among financial markets,
and greater commercial presence or foreign financial firms in countries around the world. An important element of the globalization trend has
been increased stock exchange activities taking place abroad, most notably for emerging market, but also for developed countries. This has
informed nation all over the world to reform their financial market. (Stijin, Daniela, and Sergio, 2004)
Global economy reforms are expected to foster domestic market development through their impact on the stock market internationalization
process. According to the argument, poor domestic environment prompt firms and investors to use international markets more intensively. A
poor domestic environment has long been considered one of the main reasons, for capital flight and greater use by domestic residents of financial
services offered abroad (see, for example, Collier, Hoeffler, and Pattillo, 2000). Over the last decades, there has been on increasing migration of
securities markets activities to major international financial centers, such as New York and London.
Despite the intense reforms effort, the performance of local stock markets in many developing countries like Nigeria has been disappointing.
Although some markets, this growth was not as significant as the one witnessed by the most advance nations. Other countries experience an
actual determination of their domestic stock markets. Stock markets in many developing countries remain illiquid and segmented, with trading
and capitalization concentrated on few stocks. The large number of policy initiative and the dismal performance of stock market have raised
several questions. Is it possible that stock market do not respond to reforms and that the policy prescriptions were based just on cross-country
evident? Is more time needed to see the full fruits of reforms? Dues the reforms agenda need to be rethought?
With the above stated questions, it shows that there are number of fundamental factors that affect both the development of the local stock market
and the degree of global economy activities. The fact that the processes of local stock market development and global economy activities are
driven by the same factors is not consistent with the argument that explains globalization as a result of a poor domestic environment.
The paper objective is to investigate the impact of the global economy activities has on the development of the Nigeria stock market.
The paper is structured as follows: section II Provides the review of literature, section III presents the method of the study, section IV discusses
the result of the study, lastly the section IV conclude the study.


Literature review

Globalization is an integral part of human history. In its more generic and broader sense, it is the part of the movement of history. All through
the history of man, thy have noticed a force which seems to push for greater integration of human activities. Emphasis today is however, more
focused on the economic aspect of the process. Globalization, therefore, is the process of increased integration of domestic economy with the
rest of the world to create a coherent global economy (Omah, Fadeyo, Adisa, and Osamor, 2013).
The effect of global economy activities on the development of Nigeria stock market development has been frequently analyzed with various
date, measure and methods. Chanda, (2001) uses index of capital account openness to show that more developing countries have suffered from
globalization than other, while Rodrik (1998) as well as Alesina, Vittorio, Milesi-Ferreti, (1994) found no affect of capital account openness.
The stock market operation refers to the arrangement of financial investment, the buying and selling of shares and the procurement of loans and
debentures in the transactional environment. The financial investment could be short, medium or long term in nature and the investments are
basically carried out in the form of shares/stocks/bonds or other forms of investment such as debenture (Omah, et al, 2013).
It is well known that many emerging markets are not fully integrated into world markets (see Bekaert and Campbell, (1995), Henry, (2000)] and
Bekaert, Ehrmann, Fratzscher, and Mehl, (2013). Segmentation is first and foremost caused by regulations that make it difficult for the foreign
investors to buy equity in the particular country.


Emerging Stock Markets and Global Economic System: The Nigeria Experience
International Journal of Economy, Management and Social Sciences Vol(4), No (7), July, 2015.

The stock market and more general financial liberalization process that took place at the end of the 80s and throughout the 90s relaxed a lot of
the regulation, creating the emerging market asset class in the process. The globalization process may serve to integrate emerging market with
global capital market, but how is this measured? The focus on globalization is based on two aspects; they are first, economic openness as
measured by the trade liberalization Dummy, taken from Wacziarg and Welch, (2008). They call a country open to trade when it satisfies a
number of criteria regarding tariff and non-tariff barriers. Its a zero-one dummy. Second, financial openness for which the study shows
indicators: the capital account openness index from Quinn and Toyoda (2008), and the equity market openness indicator Bekaert, Harvey and Ng
(2005). The capital account index score the degree capital account openness between 0 and 1 based on IMF data. The equity markets measure
takes the ratio of invest able to total market capitalization.
For global asset managers; globalization has been considered a fundamental issue. It increased country correlation, and changed systematic risk
measure and may therefore undermine standard asset allocation model, however, the integration process is far from complete. The third largest
market in the world (china), for example, is largely closed to foreign investment. More importantly, a relation of restrictions on foreign investor
does not necessarily lead to integrations as other factors may effectively segment the market from global capital market, this shows that there is
still a sharp contrast between emerging and developed market, with emerging markets showing mostly medium to low scores on there indicators
of corporate governance, political stability and corruption (Geert, and Campbell, 2013).
Lot of studies has been carried out to show the effect of global stock market on the development of emerging stock market. In a study based on
stylized facts and econometric method, Uwatt (2004), observed that globalization could potentially benefit the African economy. He concluded
that potential benefits derivable by African countries stock market development depended largely on how fast they could be integrated into the
rest of the world and their preparedness to meet the global financial stock market activities resulting from globalization. Akinboyo,(2003), study
on Nigeria appeared to support the need for preparedness on the part of African countries. This view was supported by Olayinka and Ogundiran
Akinlo, (2003) examined the impact of globalization on the stock market and observes that globalization through foreign direct investment has a
significant impact on capital formation and factor productivity. Dollar and Kraay (2004) studied the effects of globalization on poor developing
countries and noted that over half of them that experienced globalization gained large increases in trade and considerable reduction in tariffs.


Method of the study

Model specification
The linkage between merging stock market and global economy development has occupied a central position in the development literate,
Samuel, (1996); Leiun and Zeros, (1996); Onsode, (1998) etc. in investigating this link, the study adopts the neoclassical growth model to
explain this link. The model is retransformed into the general aggregate production function. This approach has get a wide application in
econometric analysis, for example, Akinlo and Odusola, (2000); Levine and Zeros, (1996); and obstfeld, (1994).
The function state that:
g= f(Li Ki T). (I)
g= growth of GDP
K= Capital formation/ investment
T= Technology
The application of this method, however, has been extended to incorporate, other determinates of economic activities link, for stock market,
market capitalization trade volume, for global economy activity; data from the Bank of New York, which cach the three major stock exchange
in the U.S, NYSE, NASDAQ; and AMEX, and data on volume traded by foreign frims on the London stock exchange (LSE).
In line with the above specification, the model that is adopted by this study is specified thus:
NSE= f(MC, TV).(II)
NSE= Nigeria stock exchange
MC= market capitalization
TV= trade volume
GEA=f (3 stock market capitalization USA & London
GEA=f(3.SMC, LSE)..(III)
The estimated form of the model is as given below
GEA (3SMC+LSE)= a+ b, mc+l22 TV + U..(IV)
U= error term
Model estimation techniques
Regression analysis of the ordinary least square is adopted in this study to test the relationship between the Nigeria stock market and the global
economy activities.
Equation (IV) may be estimate using ordinary least square technique (OLS. The equation will also be subjected to a dynamic estimation using
the lagged structure of the variables.
Sources of Data
This study used data concerning the period of 2003 to 2013. These data were sourced mainly from different sense of Nigeria stock exchange fact
books, Nigeria stock exchange annual report and account (various issues), central Bank of Nigeria bulleting, international monetary funds
reports (IMF), and would back repents.

Owolabi Adesegun Oluwasanmi *, Owoola R. Ibukun-Falayi


International Journal of Economy, Management and Social Sciences Vol(4), No (7), July, 2015.



The regression results for ratio of market capitalization indicate that general stock market development is affected by selected variables.
Financial openness also positively affects stock market development. The results for the ratio of Nigeria stock value trade to GDP indicate that
the value stock value trade affect by the same variable that drives stock market development in general.
The result also show that some factors drive Nigeria stock marlet development and global economy market, in the same direction, however, the
estimated coefficient do not reveal whether the domestic stock market development and global economy development are similarly sensitive to
change in fundamentals. The result shows that the domestic stock market is not positively significance as that of the global stock market.
The ratio of the value traded abroad (i.e both 3smc and LSE) to the value traded domestically also increase with the level of economic
development and financial openness. Government deficit has a greater impact on Nigeria domestic value traded, i.e, a greater government deficit
crowds out domestic market trading more than global stock market.
The regression result also show that the more developed the economy, the greater the shave of capital raised abroad. Government deficit is only
statistically significant with a negative coefficient in one specification domestic.
The lack of significance of many of the variables may be explained by the fact that the ratio of capital raised abroad to capital raised
domestically is very volatile from year to year, partly due to the lumping nature of capital raising with individual capital; issues impacting the
ratio significantly. But it could also reflect that the capital raising trends domestically and abroad are not distinctly affected by these economic



The emerging stock market only represents 15% of World equity market capitalization, but more than 30% of the World GDP. This does not
necessarily make emerging markets interesting investment. Since the liberalization process in the late 80s and early 90s, the correlation between
emerging stock markets and global or developed stock markets (like that of New York and London) has increased substantially and valuation
ratios have partially converged.
However, recent research by Bekaert et al (2011) suggests that emerging stock markets are still not fully integrated into the global economy or
stock market; therefore, emerging markets should still be viewed as a separate class.
The paper empirical analysis suggests that the underlying factors affecting the development of a local stock market also increase the
globalization of the market. In particular, the paper show that, while better fundamentals lead to an increase in domestic activity and
globalization, better fundamentals actually also spur an increase in capital raising, listing, and trading in foreign exchanges relative to domestic
While the study shed light on the domestic stock market development and globalization process, most of the issues on the more general financial
sector development strategy go beyond this analysis. More research is needed, for example, on what constitutes not only the minimum legal, but
also the institutional setup for an active first-stage financing market and possibly secondary market, and whether or not that includes some
formal stock exchange for the trading of public shares.

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