Academic journal article International Journal of Business

Did the Economic and Financial Crises Affect Stock Market Sensitivity to Macroeconomic Risk Factors? Evidence from Nigeria and South Africa

Academic journal article International Journal of Business

Did the Economic and Financial Crises Affect Stock Market Sensitivity to Macroeconomic Risk Factors? Evidence from Nigeria and South Africa

Article excerpt


This study examines the impact of the economic and financial crises on the sensitivity of the Nigerian and South African stock indices to macroeconomic risk factors including inflation, interest rates, exchange rates, gold prices and oil prices. The study finds that following the economic and financial crises of 2008, the stock markets of Nigeria and South Africa became more sensitive to most of the macroeconomic risk factors, indicating a greater influence of fundamental economic variables in stock market dynamics or a diminution of irrational exuberance. We found both markets to be insensitive to the interbank rate.

JEL Classifications: G12, G15

Keywords: macroeconomic risk factors; Nigerian Stock Exchange; Johannesburg Stock Exchange; arbitrage pricing theory

(ProQuest: ... denotes formulae omitted.)


The Arbitrage Pricing Theory or APT (Ross, 1976; Ross and Stephen, 1980; Chen, Roll and Ross, 1986) suggests that there might be a number of macroeconomic variables which are priced in stock markets, unlike the capital a sset pricing model's (CAPM) market portfolio (Sharpe, 1964; Lintner, 1965). In applying the APT, however, we trade the simplicity of the CAPM's market portfolio for an undefined and potentially large number of macroeconomic variables that could explain stock returns. Nevertheless, the intuition that stock returns are explained by more than one variable has motivated a large and growing number of investigations of the impact of macroeconomic variables on stock returns.

A study by Ikoku and Hosseini (2013) investigated the sensitivity of the various sectors of the Nigerian stock market to changes in interest rates, inflation, exchange rates and oil prices. The results provided information which was important in determining how the various sectors of quoted stocks on the exchange reacted to the aforementioned macroeconomic factors by estimating their elasticities. While the results of the study were mixed across the sectors, we drew motivation from this study in developing this paper. Unlike the paper by Ikoku and Hosseini, we increased the number of macroeconomic risk factors in this study, determined the sensitivity of the whole market, as against sectors, to the risk factors, and also included the South African stock market for comparison. In addition, we try to determine the impact of the global economic and financial crises (EFC) on the sensitivities of the two equity markets.

In order to address the gap in literature on emerging African markets, we were driven to study select African markets, based on the availability of data, to determine how effective the APT is in estimating the movement of stock prices. Also, motivated by the events associated with the recent global financial crisis, our decision to divide the data into two parts to enable us study the impact of the crisis on sensitivities further enriches our findings and would provide more relevant information to policy makers and investors alike.

This paper seeks to examine whether the EFC had an impact on the sensitivity of two prominent African stock markets to macroeconomic variables. Did the sensitivity of the frontier stock market of Nigeria and the emerging stock market of South Africa to inflation, exchange rates, short-term and long-term interest rates, the price of Gold and Crude oil change as a result of the economic and financial crises that began in 2008? This is an interesting question that deserves a thorough investigation, and this paper seeks to shed more light on the issue.

The rest of this paper is structured as follows. Section II presents a brief review of the literature, Section III discusses the data and methodology employed for this study, and Section IV presents the results of the empirical analysis. In Section V, we offer an interpretation of the results and Section VI concludes.


While there has been extensive research on the impact of macroeconomic variables on stock indices in developed markets, the same cannot be said of emerging much less frontier markets. …

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