CAN THE STOCK MARKET PREDICT ECONOMIC ACTIVITY IN NIGERIA?
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Abstract
The stock market has traditionally been viewed as an indicator or predictor of the performance of the economy. Theoretical reasoning on why stock prices might lead economic activity is based on the "wealth effect" from fluctuations in stock prices, the traditional equity valuation models, and models that attempt to explain how expectations are formed such as the adaptive expectations model and the rational expectations model. The study is based on time series data for the period 1981-2008. Empirical analysis was conducted through stationary tests, cointegration test and Vector Error Correction Model. The results indicate a causal relationship between stock prices and the economy. The stock market does predict the performance of the economy in Nigeria. This is consistent with the wealth effect; the economic activity is affected or "caused" by fluctuations in the stock market. A reformed stock market in Nigeria is advocated to boost domestic savings and increase the quantity and quality of investment