CHAPTER 3 ON THE ROLE OF STOCK EXCHANGE MARKET IN A DEVELOPING ECONOMY ( A CASE STUDY OF THE NIGERIA STOCK EXCHANGE ).

             CHAPTER THREE

3.1 RESEARCH DESIGN

As regarding these project, for clear explanation, secondary data will be employed, which will be necessary to obtain information for the topic; the role of Nigeria stock exchange market in Nigeria economic development.

Secondary data source are printed materials used in building the literature review which are among other purpose provide a theoretical (Background of the study).

POPULATION AND SAMPLING TECHNIQUES

Due to the nature of research topic( the role of Nigeria stock exchange market in Nigeria development)n which is the contemporary predicament in most of the companies, the researcher has to take many things into consideration before targeting who and who constitute the production, consequently for the fact that the topic of the research is technical, in order to ascertain valid valuables and automatic information, the researcher had to confine the population to those in the stock exchange of Nigeria economy which comprise of the companies.

3.2 METHOD AND SOURCES OF DATA COLLECTION

This study uses the error- correction method to analyze the quantitative effects of stock market development on economic growth. This paper adopts the model of Chee Keong Choong et al (2003) with slight modifications. In their models, the authors experienced economic growth as a function of stock market development (measured by the size of and liquidity of level of the stock market. They also include two control variables namely openness argued that government intervention (through the use of discount rate) affects the relationship between financial development and economic development. Moreover, the central bank can adjust the liquidity level in he equity market and influence the ability of ranking institutions in the supply of funds. It is believed that openness of the economy helps to attract foreign investment. This is true increase the activities on the stock market as firms would attempt to raise  investment funds (capital) from the stock market. The only addition to the original model is the inclusion of the all – share index. Thus, our econometric model is specified as:

In (GDP) =α_O + α_1,  in (CAPGDP) +α₂ in (TNOVGDP) +α₃ in(ALLSHARE) +α₄ in (OPENGDP) +α₅ In (DAR) + U

3.3  VALIDITY AND RELAIBILITY OF INSTRUMENTS

A  prior expectation requires that α_{1 ,}α_2, α₃andα₅ > 0, while +α₅ 

<0. The variables in the model above are defined has follows: GDP refers to economic growth and it is measured as the logarithm of the real GDP. The variables was used by Arestic et al (2001) in their empirical work. CAPGDP refers to market capitalization. It is obtained by dividing the total market caplitlaistion by GDP. TNOVODP refers to market turnover by GDP. OPENGDP refers to openness of the economy. It is measured as total import and exports divided by GPD. DRR refers to the minimum rediscount rate. Chee laeong choong et al (2003 ) con sideraed market capitalization, market turnover, oepness  and the  d iscoutn rate as I m protant determinants (of economic growth) in their  study. ALLSGHRE refers to all – share index of the Nigeria stock market. Finally, U refers to error or distributance term. In addition to the GDP, all the varibles are expressed in their natural logarithmfrom (LN). this study covers the period 1981-2007. The period is chosen because the information on all share index (an important variable considered in our analysis  )  is only a variable from 1984. The E-view of software was  to analyses the data.

3.4  Sampling framework techniques

Before we estimate the relationship between economic growth  and stock market development (including the control variables ) , there was  nee to perform a causality test. This is to ascertain whether a uni-directional or bi - directional (feed back ) relationship exists between economic – growth and stock  market development. To achieve this purpose , the author  employed the ganger – causality statistic. Two lags of the variables were considered in the causality test. The result of the casualty test is presented below 

Table 1. The result of the Granger – causality test.  

Null hypothesis	Estimate	Casual interference
LN ALL SHARE Does Not Granger CAUSE Ln GDP	F= 1.63497 (0.22590)	No causality
LN GDP does not Granger Cause	F= 0.12953 (0.87942)	No causality
CAUSE Ln GDP	(0.55767)	No causality
LN GDP Does Not Granger cause LN CAPGDP	F= 0.34284 (0.71484)	No causality
LN TNOVGDP does not Granger cause LN GDP	F=1 .30026 (0.29975)	No causality
LN GDP does not Granger cause LN GDP	F= 3.45414 (0.05663)	Causality
LN OPEN GDP Does Not Granger	F= 1.72863 (0.20908)	No causality
LN GDP does not Granger cause LN OPENGDP	F= 1.66262 (0.22030)	No causality
LN DRR Does Not Granger cause LN GDR	F= 0.86172 (0.44114)	No causality
LN GDR does not Granger  cause LN DRR	F= 2.80144 (0.09055)	Causality

Note: The decision rule of the causality test state that if the probability value of the e stomata is higher than the 5 percent or (0.05) level of significance, we accept the null hypothesis, sad vice versa.

The next step is to conduct the stationary (unit root) test on the variables. This is achieved by employing the augmented doctor – fuller (ADF) Statistic.  The result of the statutorily test is shown in table

Variables	ADF statistics	Critical value	Order  of independence
LN GDP	-4.472136 (0,0001)	1% = -2.679735 5% = -1.958088 10% = -1.607830	Stationary at first  difference
LN ALL SHARE	-4.4796003 (0,0001)	1% = -2.692358 5% = -1.960171 10% = -1.607051	Stationary at first  difference
LN CAPGDP	-5 .528914(0,0000)	1% = -2.6685718 5% = -1.959071 10% = -1.607456	Stationary at first  difference
LN TNOVGDP	-8.375785  (0,0000)	1% = -2.692358 5% = -1.960171 10% = -1.607051	Stationary at first  difference
LN OPENGDP	-4.358632 (0,0002)	1% = -2.679735 5% = -1.958088 10% = -1.607830	Stationary at first  difference
LN DRR	-4-553086 (0,0001)	1% = -2.685718 5% = -1.959071 10% = -1.607456	Stationary at first  difference

The result of the unit root  test indicate that three variables, LN GDP, LN OPENGDP and LN DRR are stationary at the first difference, while LN ALL SHARE, LN CAPGDP and LN TNOVGDP are stationary at second difference.

Finally we estimate the relationship between the economic growth and it potential determinants.

The result of the estimate is presented in the table below.

Table II. The result of the estimate dependent variable: LN GDP

Method: Leart squares

Date:  11/11/09 Time 12:45 

Sample: (adjusted): 1985 -2006

Included observation: 22 after adjusting endpoints

Variables	Coefficient	Std. Error	T. Statistic	Prob
C	7.384129	1.039652	7.102498	0.0000
LN ALL SHARE (-1)	0.255780	0.154356	1.657077	0.1183
LN CAP GDP	0.652445	0.247560	2.635502	0.0187
LN TNOGDP	0.260294	0.082670	-3.148596	0.0066
LN OPENGDP	0.403458	0.153696	-2.65034	0.0191
LNDRR	0.784264	0.259471	3..022552	0.0086
ECM (-1)	0.906009	0.205864	4.401005	0.0005
R- Squared	0.92080	Mean Dependent Variable S.D dependent Variable Schwarz info criterion   F- Statistic Prob (F-Statistic  )		11.63636
Adjusted R- squared	0.889131			0.492366
S.E of Regression	0.163943			-0.525225
Sum Squared  Reside	0.403159			-0.178075
Log likelihood	12.77748			29.06884
Durbin Watson	1.977183			0.000000

The result of the estimation show the exploratory variables account f or approximately 92.08 percent variation in economic growth. The F. Statistic (29.07) indicates that the explanatory variables are jointly significant and are capable of explaining changes in economic growth. The Durbin Watson statistic (1.98) Illustrate the absence of auto (serial) correlation. The econometric results also reveal that the all share index has an insignificant positive effect on economic growth at 5 percent level of significance. Another discovery from the estimation is that market capitalization -GDP ratio n has significance. A 1 percentage increase in the market capitalization-GDP ratio raises economic growth by approximately 0.65 percentages. However, market turnover –GDP ratio has significance. A 1 percentage increase in the turnover GDP ratio reduces economic growth by approximately 0.26 percentages. The regression results also reveal that openness.  GDP ratio has a significant negative impact on economic growth of 5 percent level of significant. A1 percentage increase I openness GDP ratio leads to 0.40 percentage reduction in economic growth. Moreover, the estimation shows that discount rate has a significant positive effect on economic growth at 5 percent level of significance. A 1 percentage increase in the discount rate leads to approximately 0.78 percentage increase in economic growth. Our findings that the stock market development (measured by market capitalization GDP ratio) raise economic growth is consistent with Abdullahi 2005. Adam and sanni (2005), Obarmiro (2005) in nigeria. It also in l ine  with Levine and Zervos (1998), Hamid molitzti and Sumit Agarwal (1098), minier (2003), chee keong choong  et all (2003), nierwerburgh et al (2006), liu HSU (2006), surge Babadur and suman newpane (2006) and muhammed shabaz et al (2008), who reported that stock market development facilitate economic growth.

The partial adjustment parameter has been shown to zhave a positive sign and significant thus indicating the divergence between the actual and desired level of growth within a particular period. Lastly, it is shown that variables are co-integrated and a long run equilibrium or relationship exists between the variables.

3.5 METHOD OF DATA ANALYSIS USED               

These deals with the analysis of data collection through interview there hundred percentage regarded in the respect of the response to question 5, question were drawn out during the introduction period. The questioned were made up of oral and verbal question tally method will be used to analysis being created to hear the opinion of the respondent in relation to stock exchange market of Nigeria economic development.