Nigerian Stock Market

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RESEARCH PROPOSAL

PROPOSED RESEARCH TITLE: An investigation into the downward trend in global stock markets: a case study of the Nigerian stock market

RESEARCH BRIEF

The history of stock trading and trading associations can be traced as far back as the 11^th century when Jewish and Muslim merchants set up trade associations. After centuries of evolution, stock markets have become the symbol of commerce in the modern world. It operates in various countries and trades a range of securities. The world stock market capitalisation is estimated to be about $ 36.6 Trillion. The stock market has various functions such as capital mobilisation, investing opportunities, risk distribution etc. The major stock exchanges in the world today include New York Stock Exchange, London Stock Exchange, Frankfurt Stock Exchange, Italian Stock Exchange, Hong Kong Stock Exchange and Tokyo Stock Exchange.

There have been various stock market crashes in the past such as the Wall Street crash of 1929, the crash of 1973/74, the 1987 crash; called black Monday, the dotcom bubble of 2000 and the more recent crash in 2008 caused by the subprime mortgage crisis in America. The economic crisis of 2008 which originated in America spread to various economies in the world and their stock markets were affected. It reduced the value of stocks around the world by as much as 41% and affected both major and emerging stock markets. The Nigerian stock market is an emerging market in Africa. After attaining the position of one of the most profitable, efficient and fastest growing equity market in the world, with a return on investment of up to 78% in 2007 the Nigerian Stock Exchange (NSE) was seen as an investment haven.

On reaching an all time high of 66,371.2 points and N12.6 Trillion in market capitalisation in March 2008 the Nigerian Stock Market (NSM) began to plummet. By March 2009 a year later, the NSE had lost about 60% of its value and was left with a market capitalisation of N4.6 Trillion, sending all the stake holders into panic.

STOCK MARKETS

A stock market is a place where stocks and securities can be exchanged or sold from one owner to another. It is a place where buyers and sellers of securities meet. The process of buying and selling is called trading.

Stock markets are divided into both primary and secondary markets. The primary market deals with the listing of new companies on the exchange, these companies usually want to raise finance. The secondary market deals with buying and selling existing securities. It accounts for the majority of the transactions that take place in the stock market.

There are various participants in stock markets. There are investors, brokers and market makers. The investors can be individuals or institutional bodies that trade either on their own behalf or on behalf of other investors. Broker's act as agents who try to carry out trades on behalf of their clients at the best possible price, the brokers also offer investment advice and research services. The market maker is a dealer that quotes both buy and sell prices of securities on a continual basis, if it is unable to find counterparties for a buy or sell order; they have to be prepared to take an open position.

The stock market reflects and magnifies all economic flaws. When the economy looks good, the stock market performs well and when the economy goes bad, the stock market reflects it as well.

MARKET CRASH

A market crash is a large and sudden drop in asset prices. Market crashes are usually accompanied by large selling pressures in the market. The drop in asset prices occurs really quickly while the recovery is a slow process.

FINANCIAL CRISIS

A financial crisis is a disruption to financial markets which hinders the market's capacity to allocate capital. According to Portes and Vines (1997) all crisis are “crisis of success” because initially the capital inflow into the market is a sign of economic promise and success but this inflow is usually unsustainable.

FINANCIAL CRISIS IN EMERGING MARKETS

When there is a financial crisis in an emerging market such as Nigeria. It results in a series of chaos. An economy which has benefited from large capital inflows stops receiving such inflows and faces a sudden reversal of capital flow. Financial crisis in emerging markets are usually accompanied by difficulties of the concerned party to honour its contractual responsibilities to foreign investors. The anticipation of such difficulties could set off disorderly actions if investors rush to take out their investment from the crisis country.

EFFICIENCY OF FINANCIAL MARKETS

The efficiency of a market could be looked at from a variety of view points. It could be an allocative, operational or informational efficiency. Allocative efficiency has to do with how well a market allocates scarce capital resources amongst competitors in order for them to be used most productively. In an ideal situation capital would be allocated to firms that can achieve the best marginal returns.

A market is operationally efficient if the transaction costs of operating the market are determined competitively. In an ideal situation investors will pay minimal transaction costs and competition between brokers would ensure that only normal profits are earned on their activities. A strict adherence to operational efficiency will mean that transaction costs of making a market are zero, this however is unrealistic because markets will not exist if the people who operate them are not rewarded for doing so.

A market is informationally efficient if the current market price of a security instantly and fully reflects the all relevant available information.

A market is said to be perfectly efficient if it is concurrently allocatively efficient, operationally efficient and informationally efficient.

RESEARCH AIMS AND OBJECTIVES

In my research I intend to look at the reasons for the collapse of the Nigerian Stock Market, the effects of the global economic crisis on the NSM and also the other challenges faced by the Nigerian Stock Market as an emerging markets as stipulated by Pettis (2001). My aims and objectives are

1. To review extant conceptual models and theoretical frameworks related to evolutionary trends of the Nigerian Stock Market.

2. To identify the cause of the present crisis in the Nigerian Stock Market and relate it to past crashes in global stock markets.

3. To examine the characteristics of the recent downward trend in the Nigerian Stock Market in relation to financial crisis in emerging markets.

4. To recommend solutions based on my research that will help to predict and prevent financial crisis.

RESEARCH QUESTIONS

In order to guide my inquiry and shed more light on my research into the downward trend in the Nigerian Stock Market I intent to answer the following research questions:

1. How does previous crashes in global stock markets relate to the present crisis in the Nigerian Stock Market?

2. What are the causes of the downward trend in the Nigerian Stock Market?

3. Is the NSM crisis as a result of the global financial crisis or is it a challenge faced by emerging markets?

LITERATURE REVIEW:

As shown in Feridun (2004), the literature on financial crisis is classified into three models namely first-generation models, second-generation models and third-generation models. The first generation model Krugman (1979), Flood and Garber (1984) explains that “a government with continual money-financed budget deficits is believed to use a restricted stock of reserves to peg its exchange rate and the attempts of investors to anticipate the inevitable collapse generates a speculative attack on the currency when reserves fall to some critical level”.

The Importance of investor's beliefs was highlighted in the second generation model, Obstfeld (1994) (1996), Radelet and Sachs (1998) Ozkan and Sutherland (1995) all agreed that “policy is less mechanical: a government decides whether or not to defend a pegged exchange rate by making a trade off between short-run macroeconomic flexibility and longer-term credibility”. The crisis then starts from the fact that defending parity is more expensive as it requires higher interest rates. Should the market believe that the defence will ultimately fail, a speculative attack on a currency develops either as a result of a predicted future deterioration in macro fundamentals, or purely through self-fulfilling prediction (Vlaar, 2000).

The third generation model which came about in the 1990's after the Mexican tequila crisis of 1994 and the Asian crisis of 1997. Dooley (1997) Krugman (1998) Radelet and Sachs (1998) classified it into three different groups which are moral hazard, herd behaviour and contagion. Moral hazard emphasises mainly on “liquidity shocks” as an explanations of financial crisis. Herd behaviour which was developed by Banerjee (1992) and Bikchchandani et al (1992) complements the logic in the second generation models by illustrating a mechanism where large expectation shift occur due to a small injection of new, possibly wrong information. This theory leads to an emphasis on the informational transparency in markets to prevent financial crisis. The contagion model comes in a variety of theoretical forms and has been subjected to a large amount of empirical testing and scrutiny. Contagion is “the cross-country transmission of shocks or the general cross-country spill over effects”. Contagion can take place both during "good" times and "bad" times. Then, contagion does not need to be related to crises. However, contagion has been emphasized during crisis times.

The recent efforts at developing an early warning system for a looming financial crisis have taken the form of two related approaches which are probit/logit model or signalling model. The probit/logit model was pioneered by Frankel and Rose (1996), they used limited dependent variable models known as probit or logit regressions to identify the causes of crisis and to predict future crisis. The signals approach was developed by Kaminsky et al (1998), and it consists of a bilateral model where a set of high frequency economic variables during a specified period is compared, one at a time with a crisis index so that when one of these variables deviates from its normal level beyond a specific threshold value prior to a crisis it issues binary signals for a possible currency crisis.

The statement that market prices instantaneously and fully reflect all relevant available information is known as the efficient market hypothesis. Fama (1970) provided an operational base for testing market efficiency by distinguishing between three types of efficiency: weak-form efficiency, semi-strong-form efficiency and strong-form efficiency. According to Fama (1970):

“A market is said to be weak-form efficient if the current prices of securities instantly and fully reflect all information of the past history of security prices. A market is said to be semi-strong-form efficient if the current prices of the securities instantly and fully reflect all publicly available information. A market is said to be strong-form efficient if the current price of securities instantly and fully reflects all information, both public and private”.

RESEARCH METHODOLOGY:

Research is an essential part of academics, “research is the systematic study of materials and sources etc. in order to establish facts and reach new conclusions” (Oxford Concise Dictionary). The process by which a research is written or carried out is very important because it has a huge impact on the conclusions reached at the end of the research. There are two major research philosophies which underpin the research strategy and the method that will be used to carry out a research (Collis and Hussey, 2009). They are the positivism and interpretivism research paradigm.

Positivism involves “working with an observable social reality and that the end product of such research can be law-like generalisations similar to those produced by the physical and natural scientists”, the assumption is that “the researcher is independent of and neither affects nor is affected by the subject of the research” (Remeneyi et al, 1998:32). Interpretivism is “a philosophical position which is concerned with understanding the way we as humans make sense of the world around us, the underlying assumption is that by placing people in their social context, there is greater opportunity to understand the perceptions they have of their own activities” (Hussey and Hussey, 1997).

The paradigm adopted contains important assumptions about the way the researcher views the world Saunders et al (2007), in conducting this research, I will employ the positivist paradigm because by using a reality which is separate from my knowledge of the area, it provides an objective reality against which researchers and other stakeholders in the Nigerian Stock Market can compare claims and ascertain the truth. The positivist paradigm will also make it possible for my results to be applied externally and more broadly outside the study context because it will be reliable and unbiased. I will be detached from my research and have little or no influence on the data collected. The research will be undertaken in a value free way because irrespective of what I feel or think, I cannot change or alter the facts about the collapse of the Nigerian Stock Market.

The research strategy that will be used is the case study which according to Robson (2002:178) is “a strategy for doing research which involves an empirical investigation of a particular contemporary phenomenon within its real life context using multiple sources of evidence”. The case study strategy will be very good for this research because it will give the much needed in depth understanding into the collapse of the Nigerian Stock Market. Since a case study is closely aligned with an interpretivist perspective, the proposed study will triangulate survey with case study. The primary benefit of this triangulation is that survey will flesh out larger data collection than case study which emphasises on a smaller scale. Research methodologies can either be quantitative or qualitative, quantitative is the use of numerical data or data that have been quantified while qualitative is the use of non-numerical data or data that have not been quantified. Quantitative and qualitative data collection techniques and analysis procedures each have their own strengths and weaknesses (Smith, 1975). In order to seek convergence of results this research will be triangulated because I will use both qualitative and quantitative research methodologies. The findings from the quantitative will help to validate the findings from the qualitative thereby making the research more reliable and credible. The application of these two methods allows them to counter balance the strengths of each other. Tashakkori and Teddlie (2003) say that “multiple methods are useful because they provide better opportunities to answer research questions and better evaluate the extent to which research findings can be trusted and inferences made from them”.

RESEARCH METHOD:

For the purpose of this research, I will be making use of secondary data. Secondary data is data that have already been collected for some other purpose, perhaps processed and subsequently stored (Saunders, et al 2007). There are three main types of secondary data: documentary, survey and those from multiple sources. I will use data such as previous share prices, public offers, market capitalisation etc. of various companies quoted on the Nigerian Stock Exchange. I will focus on the banking sector which is a major player in the Nigerian Stock Market and examine the trends that took place in the sector and its overall effect on the Nigerian Stock Market. Interviews will also be used as a data collection method; this will help to get well-founded and reliable data that is relevant to my research aims and objectives and also help to answer the research questions. An interview is a purposeful discussion between two or more people (Kahn and Cannell, 1957). Interviews can be structured, semi- structured or unstructured. A structured interview is a data collection technique in which an interviewer actually meets the respondents, reads them the same set of questions in a prearranged order and records their reply to each question. A semi-structured interview is a type of interview where the interviewer starts with a set of interview topics but is ready to vary the order in which the questions are asked and to can ask new questions in the framework of the research circumstances. An unstructured interview is an informally conducted interview that may commence with one or more subject matter to discuss with the participants but without a predetermined list of questions to work through.

Semi-structured and unstructured interviews will be used for this research because the semi-structured interviews will allow me to get answers to precise areas of the research that needs clarification and are specific to each respondent while the unstructured interviews which will be less restricted will allow the interviewee to express their opinions freely and give me the opportunity to get information that could be useful to my research which I don't necessarily know exists. Also, a lot of the opinions regarding the crash of the Nigerian Stock Market vary from person to person; the unstructured interview will give me the opportunity to get in-depth and varied response from the various respondents.

I will interview

· Representatives of regulatory bodies

· Representatives of corporate organisations

· Stock brokers and analysts

· Shareholders and investors

ANTICIPATED METHOD OF ANALYSIS AND FINDINGS

Data analysis is a process that aims to describe facts, identify patterns, develop explanations and test hypothesis. All of these help to highlight vital information and recommend conclusions which help in decision making processes. Data can be analysed using various methods such as content analysis, theoretical sampling, thematic analysis, grounded theory etc. Bernard (1952) defined content analysis as "a research technique for the objective, systematic, and quantitative description of manifest content of communications". Thematic analysis is an approach to dealing with data that involves the creation and application of `codes' to data, there is a link between this method and the grounded theory method. Grounded theory was discovered by Glaser and Strauss (1967) as a method of analyzing data, it is a systematic analysis of data that aims to develop a higher level of understanding or generate theories regarding a social phenomenon. The grounded theory approach will be used for this research because it will help to analyse the information gathered into a clearly defined hypothesis that will explain the reason for the crash of the Nigerian Stock Market. Data will be analysed using the axial coding which will help to identify relationships between the various categories of data through a combination of inductive and deductive thinking.

The quantitative data such as market capitalisation, return on capital, liquidity, market efficiency and various macroeconomic variables which are linked to the collapse will be analysed using the chi square and the analysis of variance. I will compare these variables over a period of three years and across various sectors in the Nigerian Stock Market. For each variable, I will analyse its behaviour during the crisis and pre-crisis period and compare it with its behaviour during a non crisis period using a regression analysis. After the data analysis I aim to show that there is a relationship between some key economic/financial variables and the performance of the Nigerian Stock Market. I also intend to demonstrate that the downward trend experienced in the Nigerian Stock Market was due to the challenges faced by emerging markets.

ETHICAL CONSIDERATIONS:

Research ethics relates to questions about how we formulate and clarify our research topic, the data collection and processing method and how we report our research findings in a moral and responsible way. The appropriateness of a researcher's behaviour in relation to the rights of those who become subject of their work or are affected by their work is referred to as research ethics (Saunders et al, 2007). Although all research methods have specific ethical issues associated with them, qualitative research is likely to have a greater range of ethical concerns compared to quantitative research. Most of the data that will be used in conducting this research will be quantitative data. The quantitative information's are readily and publicly available without any form of moral or ethical intrusion. I will get the qualitative information the use of semi-structured and unstructured interviews. The respondents will be voluntary participants because they won't de coerced into participating in the research; they will be given full information regarding the procedure and risk involved in participating thereby giving an informed consent. The confidentiality and anonymity of the participant will also be respected, except an agreed approval is given by the respondent for his or her identity to be declared.

CONCLUSION:

This research will highlight the macro economical and micro economical factors responsible for the downward trend in the Nigerian Stock Market and develop a link between these factors and the collapse of the market. A proposition that will help prevent or forecast an imminent collapse will also be put forward.

TIMESCALE:

Proposal presentation -------------------------1^st April 2009

Written project proposal (draft)-------------- 15^th April 2009

Written project proposal (final)----------------19^th June 2009

Information and data collection----------------June 2009

Interviews with various stakeholders----------June/July 2009

Analysis of the information collected----------July 2009

Final writing of the dissertation-----------------August 2009

Submission ---------------------------------------End of August 2009

REFERENCES

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4. Dooley, M. (1997) “A Model of Crisis in Emerging Markets”, NBER Working Paper. Number 6300, Cambridge MA

5. Fama E. (1970) “Efficient capital markets: a review of theory and empirical work”. Journal of Finance. 25:383-417

6. Flood, R. and Garber, P. (1984). “Collapsing Exchange Rate Regimes: Some Linear Example” Journal of International Economics. Volume 17

7. Frankel, J. and A. Rose. (1996) “Currency Crashes in Emerging Markets. An Empirical Treatment,” Journal of International Economics. Volume 41

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18. Pettis M (2001) The Volatility Machine: Emerging Economies and the Threat of Financial Collapse

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20. Radelet, S., and J. Sachs. (1998) The East Asian Financial Crisis: Diagnosis, Remedies, Prospects. Brookings Papers on Economic Activity, 1: 1-90

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25. Tashakkori, A. and Teddlie, C. (eds) (2003) Handbook of Mixed Methods in Social and Behavioural Research, Thousand Oaks, CA, Sage

26. Vlaar, P. (2000) “Early Warning Systems for Currency Crises.” Papers De Nederlandsche Bank. Number 167

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