University of Nigeria Research Publications

Aut

hor

AGU, Reuben Amaechi PG/MSC/02/33751

Title

Globalised Financial Flows, Capital Market

Deepening, and Economic Growth: the Nigerian Experience

Facu

lty

Social Sciences

Dep

artm

ent

Economics

Dat

e

August, 2007

Sign

atur

e

TITLE PAGE

GLOBALSED FINANCIAL FLOWS, CAPITAL MARKET DEEPENING, AND

ECONOMIC GROWTH: THE NIGERIAN EXPERIENCE.

AGU, REUBEN AMAECHI

PGIM.ScIO213375 1

DEPARTMENT OF ECONOMICS

UNIVERSITY OF NIGERIA,

NSUKKA

AUGUST 2 0 0 7

I

This work has been read and approved for the award of M.Sc Degree in I

the Department of Economics, University of Nigeria Nsukka. I I -

~ e a d of Department

--.---.--------------------____________________________ Date

Dean, Faculty of Social Sciences

CERTIFICATION

AGU, REUBEN AMAECHI, a postgraduate student in the Department of Economics with Reg.

No. PG/M.Sc/02/33751 has satisfactorily completed the requirements for course and

research work for M.Sc Degree in Economics.

The work embodied in this dissertation i s original and has not been submitted in part or full

for any other diploma or degree of this or any other University.

AGU, RE EN AMAECHI I?

H? OF DEPARTMENT

P DEDICATION

This i s dedicated with warmth and love to my parents: Alexander Agu-Ugwu, my father;

and Victoria Morenike Agu-Ugwu, my late mother; for their love and foresight in laying

the basic foundation of this project many years ago - in my formative years.

And also to my loving and wonderful wife - Victoria, whose show of love, understanding

and care has been a source of inspiration. And mostly to God who i s the actual owner of

the knowledge and energy expended on this project.

ACKNOWLEDGEMENT

In the course of carrying out this study, I received helps, in one way or the other, from many

people. As such it would seem invidious of me to select just a few of them for mention here,

since mentioning al l of them would create a rather long l i s t . However, even at the risk of

appearing so (invidious) some individuals must necessarily be mentioned for the very special

helps they offered to me.

Firstly I wish to express my thanks to Moses Oduh (Chairman), who helped me with his data

bank and for his useful remarks and advice on the methodology used. I equally wish to

express my appreciation to my senior research friend, Dr. Patterson Ekeocha (Papa), for his

witty comments and advice on the empirical literature. I am also fu l l of appreciation for Dr.

F.I. Njoku, of Mathematics Department, for his useful suggestions regarding some of the

mathematical derivations used in this work. My thanks also go t o Rev. Fr. Dr. lchioku and Dr. '. Fonta for their useful advice during the period of this work. I equally received help and

encouragement from some of my classmates: Richard Ojike, Charles Manasseh, and Victor

Malolu, therefore my thanks also go to them.

I found the library of the Nigerian Stock Exchange (NSE) very useful, and their staffs were

really helpful; I am therefore immensely grateful to them.

I am highly appreciative of members of my family - my wife, Victoria; Ikechukwu;

Nwanneka; and my father, Elder Alexander Agu - Ugwu - for their encouragement and

prayers.

I owe the greatest debt of thanks to Prof. F.E. Onah, my project supervisor, who

incidentally i s instrumental to my developing interest i n International Economics, (and who 4

equally, i s the Head of Department of Economics) -for his fatherly disposition and patience

i n guiding me throughout the period of this work.

However, I remain solely responsible for the views and accuracy of information contained in

this work.

Agu, Reuben Amaechi

Postgraduate School of Economics

University of Nigeria, Nsukka

August, 2007

TABLE OF CONTENTS

Title Page

Approval Page

Certification

Dedication

Acknowledgement

Table of Contents

Abstract

List of Tables

List of Charts

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

1.2 Statement of the Problem

1.3 Objectives of the Study

1.4 Statement of Hypothesis

1.5 Importance of the Study

1.6 Scope and Limitations of the Study

CHAPTER TWO

LITERATURE REVIEW

2.1 Globalisation Finance and Economic Growth

2.2 Foreign Capital Flows to Nigeria: Nature, Trend and Impact

On the Capital Market

2.3 Determinants of Foreign Portfolio Investment (FPI) in Nigeria

2.4 The Nigerian Capital Market: Developments and Reforms

2.4.1 The Capital Market and i t s Institutions

7.4.7 D e v d o n r n ~ n t z and R ~ f o r r n z i n the N i w r i a n Canital Market

Page

i . . 11

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v

vi

vii

i x

X

CHAPTER THREE RESEARCH METHODOLOGY

3.1 Theoretical Model Specification

3.2 Derivation of the Theoretical Model

3.3 Choice of Proxies for GFF and Financial Deepening of the

Capital Market 3.3.1 Other Proxies

3.3.2 Capital Market Deepening and Financial Deepening of The External Segment of the Nigerian Capital Market (IFD)

3.4 Functional Model Specifications

3.4.1 Modeling Impact of Globalization on FPI

. 3.4.2 Model 2: Modeling the financial Deepening of ESNCM (IFD)

3.4.3 Model 3: Modeling the Financial Deepening of the Nigeria Capital Market (NCM)

3.4.4 Model 4: Modeling the Impact of Globalized Financial flows (GFF) on the Growth rate

3.5 Justification of the Model

3.6 Data Required and sources1 software for Estimation

CHAPTER FOUR ANALYSIS AND ESTIMATION OF REUSULTS 4.1 Results of Econometric Tests 4.2 Interpretation of Results 4.3 Granger Causality Tests 4.4 Other Econometric Tests

CHAPTER FIVE SUMMARY, CONCLUSION AND RECOMMENDATION 5.1 iummary of Findings

5.2 Conclusion ' 5.3 Recommendations

REFERENCES

CHARTS

Econometric Result Print Out

Of the whole complexion of globalized financial flows (GFF), Foreign Portfolio lnvestment (FPI)

stands out uniquely on account of i t s dual characterization of being distinct and essential. It i s

distinct in the sense that it i s the only type of GFF that must necessarily util ize the framework of

capital markets t o transmit from one country to another. I t s essential feature derives from i t s

potential to excite economic growth positively. Literature shows that GFF, of the FPI type, can foster

financial development through capital market deepening, which then engenders economic growth.

Opposing views posit that GFF in the form of FPI i s of "foot loose" nature and thus can lead to crisis

and contagion and as such should not be relied on for purposes of strategizing for economic growth.

Since 1998, the rise i n the volume of FPI inflow has been so impressive that it can no longer be

ignored. In fact by 2005, the inflow of FPI has surpassed that of Foreign Direct lnvestment (FDI).

This study therefore sets out t o find whether GFF flow (of the FPI type) into Nigeria has improved

under the policy financial globalization and financial integration (financial openness). And also

confirm whether this policy has impacted positively on economic growth. The relevance of this study

derives from the fact that available studies on FPI inflow are just a handful and recent, and there is

no country specific study regarding the effect of foreign portfolio investment on financial sector

development and economic growth. This study hopes contribute t o the literature in this gray area

using Nigerian data.

The study applied the dynamic distr ibuted lag model, w i th error correction, on a set of relevant

t ime series data and finds that FPI inflow has improved under the policy of financial openness. It was

also confirmed that the policy of financial openness i s positively related to capital market deepening

and hence financial sector development. Finally, it was discovered that the inflow of FPI within the

policy context of financial openness i s positively related to economic growth via capital market

deepening. Granger causality tests reveal that: financial openness, and market size, does not

granger cause FPI inflow; real rate of return (RRR) of investments granger causes FPI inflow; while

market size granger causes capital market deepening. Finally the tests revealed that there i s a bi-

directional causality relationship between capital market deepening and economic growth.

It was therefore concluded that the lure for superior rate of return causes FPI inflow, while the

policy of financial openness facilitates it. Financial openness facilitated deepening of the capital

market which led to economic growth.

Based on the results, it is recommended that there i s need that the present reforms going on in the

capital market, and the financial sector in general, be sustained given the fact that the Nigerian

financial sector has a prominent role t o play in channeling resources for investment and productive

purposes. Again, government should put i n place appropriate policies that wi l l boost continuous

inflow of foreign portfolio investment in Nigeria.

viii

> LIST OF TABLES

4.2 Table 1: Foreign Direct lnvestment and Foreign Portfolio lnvestment Inflow in Nigeria (1 996-2005).

4.1 Table 4.1 Model 1 : ADF Unit Root Test on the Quarterly series

4.1 Table 4.2 Results from Co Integration Test on Model I Estimation

4.1 Table 4.3 Result Summary for Model 1

4.1 Table 4.4 Model 2 ADF Unit Root Test on the Quarterly Series

4.1 Table 4.5 Results from Co integration Test on model 2

4.1 Table 4.6 Estimation Result Summary for model 2

4.1 Table 4.7 Model 3 ADF Unit Root Test on the Quarterly Series

4.1 Table 4.8 Co integration Results Test on Model 3

4.1 Table 4.9 Estimation Result Summary for Model 3

4.1 Table 4.10 Model 4 ADF Unit Root Test on the Quarterly Series

4.1 Table 4.11 Co integration Result Test on Model 4

4.1 Table 4.12 Estimation Result Summary for Model 4

4.3 Table 4.3.1 Direction of Causality between FPI and FG proxied by (GFR)

4.3 Table 4.3.2 Direction of Causality between FPI and RRR 60

4.3 Table 4.3.3 Direction of Causality between FPI and Map 60

4.3 Table 4.3.4 Direction of Causality IFD and RGDP 60

% 4.3 Table 4.3.5 Direction of Causality between FD and RGDP 6 1

4.3 Table 4.3.6 Direction of Causality between IFD and Mcap 6 1

4.3 Table 4.3.7 Direction of Causality between FD and IFD 6 1

5.1 Table 5.1 Annual Rates of Return on Stock Investments in NCM (A Foot Note) 63

LIST OF CAHRTS -

1.1 Chart 1 : World Export of Goods and Series

1.1 Chart 2: Foreign Direct lnvestment

1 .I Chart 3: Annual Rate of Return on lnvestment at the Nigeria Capital Market

1.1 Chart 4: Global FPI Compared to ODA (Footnote)

5.1 Chart 5.1: Determinants of FPI in flow in Nigeria

5.1 Chart 5.2: Effect of Factors changes on Financial Depending of ESNCM

5.1 Chart 5.3: Effects of factor changes on capital Market deepening

7 5.1 Chart 5.4: Effects of factor changes on the growth rate of real GDP

5.2 Chart 5.1: Globalized flow (GFF), Transmission channels and Impacts

CHAPTER 1

b INTRODUCTION

1.1 Background of t he Study

A consensus seems to have emerged amongst economists that economic growth is

inextricably tied to globalised financial flows (GFF). This GFF - growth nexus is

implicitly implicated in the relation showing domestic savings and net capital inflows

as the main sources of financing domestic investment and budget deficit*. On

exploring the equality relationship between current account balance (CAB) and the

capital account balance (CAP) of a country, it becomes obvious that a deficit on the

CAB implicitly measures the financial inflows into the country's economy and there-

fore measures the resources coming into a country to finance investment demand in

excess of national savings, i.e. savings - investment gap - 51 gap (Diwivedi, 2006; T

Okojie, 2005; Roubini and Watchel, 1997). Since globalised financial flows into a

country indicate the resources flowing into the country, an inference could be made

motivated by the fact that i f GFF equals CAB which also equals CAP, then GFF is an

alternative for financing the SI gap when confronted with difficult domestic con-

straints". Economic theory based on: Harrod-Domar; Neoclassical; and Endogenous

Growth models, recognizes SI gap as being correlated with growth, therefore GFF is

intrinsically tied to growth (Hakkio, 1995; Ayhan et al, 2003; Calvo and Reinhart,

1999; and Smith e t al, 2003).

GFF needs the framework of financial globalization (FG) and financial integration (FI).

FG and FI are in principle different concepts. FG is an aggregate concept that refers f

to rising global linkages through cross - border financial flows. FI on the other hand

refers to an individual country's linkages to international capital markets. Obviously

the two concepts are intimately related. For instance, increasing FG is perforce

associated with FI on average and together they. imply increasing GFF (Ayhan e t al,

* Recall that Uses = Sources. Uses are usually for Investment (I) and Budget Deficit (BD), while Sources are

domestic Savings (S) and Net Capital Inflow (i.e. net of GFF) Hence: I + RD - S + GFF , 'd Domestic uses >

Domestic Sources, GFF > 0, GFF = I + BD - S

* CAD 2 CAP - GFF, but ?

CAP = CAD + AR = FDI + FPI + ODA but GFF = CAD + AX

i.2 GFF = FDI + FPI t- ODA .. . - -. .. -. ~- .- ~ . . ... . .. ..-.- .- . -- ..- .

Depczrtment yf Economics, Universify ryf Nigeria Nsukkn 1 of 108

~. .~ . -~ ~ . . . . --p--.----.-.--....---.-....-...--

2003). In this study, these terms are looseiy used, i n te r~hangeab~~ , without loss of

rigor in the pursuance of the central theme.

By definition GFF includes: official development assistance (ODA) and other official

development flows (ODF) -. i.e. grants or soft loans from government and mulhtilat-

eral institutions; export credit (EC) - i.e. all forms of international trade credits by

individuals or banks; and foreign private flows international bank loans and bond

issues, foreign direct investment (FDI), and foreign portfolio investment (FPI) - which

could be debt or equity (Obadan, 2004; and Okojie, 2006).

The GFF - economic growth relation i s usually explained in mainly two ways. One way

considers the relation to crystallize through two main channels: the direct and

indirect channels. The direct channels' GFF - growth link i s brought about by:

augmentation of domestic savings; lower cost of capital due to better risk allocation;

transfer of technology; and financial sector development of the capital market. The

indirect channels' categorization rationalizes the link on the ground that GFF:

promotes specialization; induces better policies; and enhances capital inflows by

signaling better policies (Ayhan et al, 2003). The other way sees GFF as being trans-

mitted through quantity and quality effects (Abiad et al, 2006).

ODA, EC, and FDI can be transmitted without the aid of the capital market, but FPI

necessarily requires the capital market to be transmitted to any nation. Capital

markets promote economic efficiency and productive investment by channeling funds

from surplus units to deficit units who have immediate productive use for it (Woep-

king, 2004). Therefore, GFF transmitted through the international capital market into

any nations capital market (ESCM) i s strictly of FPI type. The fact that FPI i s transmit-

ted through the capital market implies that it flows to those investments that

guarantee the highest rate of return (Dodd, 2004), thereby ensuring strict allocative

efficiency in the use of FPI (Chalapati,, 1999). Thus it promotes efficiency and aids

productive investment. Some countries, especially in Asia and Latin America have

been able to utilize it (FPI) for growth, even though there are reversals in the

aftermath of the 1982 debt crisis and in the middle 1990s respectively in Latin

America and Asia (Halac, 2005) . FPI comes with some benefits which includes the

following: spreadsldiversifies risk for foreign; provides an opportunity, for other

nations, to share the fruits of growth of developing countries; provides investment

T- outlet for foreign investors that promises a better return on investment - especially

.. for pension funds; it supplements foreign exchange availability and domestic savings;

l)epar/tnen/ of'Econoniics, Univer.~i/y of' Nigeria Nsukkrr 2 of 108

M.Sc Dissertation: Globdised Financinl,flows, C ~ ~ p i t a l mar.liet deepening, and Econonzic Growth: Nigerian Erperience ~ ~ . .. . . .... .... ~ ~. ~ .... - . .. .- .

it i s non debt creating; i f involved in primary issues provides critical risk capital for

new projects; expectedly, it could help to achieve a higher degree of liquidity at > capital markets; thereby causing an increase in the price - earning (PE) ratios and

consequently reduce the cost of capital for investment; and it helps to improve the

functioning of the financial system through increased availability of funds and

improvement of the financial infrastructure thereby reducing adverse selection and

moral hazard (Chalapati, e t al, 1999; Schmukler, 2003).

I t is probable that increasing confidence in the FPI - growth nexus inspired policy

makers world over - mainly encouraged by multilateral agencies - to opt for liberali-

zation of both the financial and commodity markets and also the capital account of

their respective countries. Under this policy of trade and financial liberalization,

there was a gradual dismantling of official controls on trade and capital. Conse-

T

quently, there has been a rapid growth in international trade and services, and also

in cross border financial flows. A trend catalysed by gradual removal of official

controls on trade and capital. Statistics show that between 1970 and 2000, the value

of world exports of goods of goods and services increased by 25 percent, while

foreign direct investment (FDI) increased by 50 percent (Rybinski, 2006; Dodd, 2000

(See charts 1, 2)). At the same time private flows (debt plus equity (FPI)) surpassed

official flows (aid plus debt (ODA)) by more than seven fold by 1997 and maintained

dominance till 2003 (Rybinski, 2006)*.

In this regard, Ayhan Kose e t al, (2003) and Woepking (2004) had noted that one of

the most important developments over the past three decades has been the interna-

tionalization, and now globalization, of capital markets which gave rise to the

International Capital Market (ICM) that is composed of a number of closely integrated

markets with an international dimension. ICM allows the possibility of fund mobiliza-

tion from all over the world for subsequent investment at any point on the globe.

Source: World -. Bank's Global Development - Finance. ~ - - .. ~

Depnrtnwnt of Econonzics, Universi[v of Nigeria Nsukka 3 of 108

Al.Sc Dissertation: Glol~crlised Financinl,fTows, Capitol nlarltet deepening, and Econon~ic Growth: Nigerian Experience -.-- -- ~~ . .... .. . . - .- .. - In 1993, the Federal Government of Nigeria liberalized the Nigerian Capital Market

(NCM) and subsequently internationalized it in 1995 with the abolition of the laws

that constrained foreign participation in the NCM. Specifically, the Exchange Control

Act, 1962 was abrogated together with the Nigerian Enterprises Promotion Act, 1989

(NigeriaBusinessinfo.com, 2001). Also a lot of improvements have been made on the

operational fundamentals of the stock exchange. For instance: it operates a comput-

erized clearing and delivery system for transaction in securities listed on The Nigerian

Stock Exchange; and settlement cycle i s now T + 3. These developments paved the

way for foreigners to participate in the NCM both as operators and investors (Nigeri-

aBusinessinfo.com, 2001). In fact the International Finance Corporation, in the year

2005, rated the Nigerian Stock Market as the best in terms of returns on investment

universally (Abodunde e t al, 2007 -See chart 3). Nigeria was, as a result of al l these

development, placed on a vantage point for reaping the inherent benefits in both FI

and FG even as GFF increases with more FPI flowing in to the Nigerian capital market.

With increased inflow of FPI into Nigeria, it i s expected that: the capital market's

liquidity would improve; and there wi l l be enhanced capital market efficiency, and

reduced information asymmetry. Simply put, there would be deepening of the capital

market and, filling of SI gap' in the domestic economy which has been characterized

by inadequate savings, these would bring about economic growth.

Available literature reveal that finance matter in engendering growth, as such, since

GFF i s part of the financial flows critical for financing investment, it equally matters.

Arising from this backdrop, what i s the relationship between GFF and economic

growth in Nigeria? Particularly, does the inflow of FPI contribute to financial sector

development and through that means associated with growth?

1.2 *STATEMENT OF THE PROBLEM

The NEEDS document (NPC, 2004) has indicated a savings - investment (SI) gap of

about 20 percent for Nigeria, with the consequence that the annual average invest-

ment rate was about 16 percent of the GDP, clearly below the minimum investment

rate of about 30 percent needed to unleash a poverty - reduction growth rate of at

least 7 - 8 percent per year (NPC, 2004). The sovereign risk premium for Nigeria i s

In the National Economic, Empowerment and Development Strategy (NEEDS) document it has been

estimated that Nigeria has a savings investment gap of 7 percent. Note also that capital market

elopment. . - . .... ~... . .- . . . . .. . - -. ..

Dep~rtmerrt of Economics, University qf Nigerirr Nsukkrr 4 of 108

M S c Dissertation: Globalised Financial,flows, Capital n~orliet deepening, and Econoniic Growth: Nigerian E.xperierm --pppppp--.--.--.p--p ~ ~p~ ...............................................

perceived to be high. Equally the cost of doing business i s also high, thus private

business agents kept the bulk of their money abroad (NPC, 2004). In view of these,

coupled with the fact of wide spread mass poverty, it i s substantially difficult to raise

national aggregate savings rate to cover the SI gap. Measures to f i l l 51 gap have to be

provided i f Nigeria i s to be placed back on the path of economic prosperity.

Received theory from the Harrod -- Domar growth model shows that a basic growth

strategy i s to reduce the 51 gap by increasing the proportion of national income

saved, and this can be done through general consumption sacrifices. Recourse could

also be made to GFF (Smith et al, 2003). In other words, growth can take place if,

among other things, observed 51 gap is filled. Plethoras of literature exist to show

that foreign capital inflows could play critical roles in the filling 51 gap (Hakkio, 1995;

Okojie, 2005). Indeed, Capital flows have contributed in fi l l ing the resource gap in

countries where domestic savings are inadequate to finance investment (Mailafia, -?

2005). Therefore it i s envisaged that capital inflow would help Nigeria fast track

higher production levels and hence attain the Millennium Development Goals (MDGs)

and the objectives of NEEDS (Mailafia, 2005). FPI i s also expected to have a positive

impact on the levels of savings and investment, efficiency of investment, and also

enhance best practice, hence leading to higher productivity.

Recent works have shown some causal relationships between GFF and positive

quantity effects', the works of McKinnon (1973), Shaw (1973), Obstfeld (1994), and

Ueda (2000) generally show that increases in GFF positively impact output growth

through quantity effects. However, some economists have cautioned that it might not

be correct to always expect quantity effects under libralisation (Devereux and smith 1

1994; Bandiera and others 2000; Jayaratne and Strahan, 1996; and Sancak, 2000).

Quality effects2 due to GFF have been established by the works of many scholars.

Abiad'et al (2004) showed that financial libralisation (FL) brings about improved

allocative efficiency of the capital market. Corroborating this, King and Levine (1993)

have argued in their work that FD results i n economic growth. De Gregorio (2004)

showed that FD brought about increases i n GDP by increasing the efficiency of

investment. The works of Rajan and Zingales (1998); Wurgler (2000); Beck, Levine,

I Quantity effect refers to increase in the magnitude of savings and investments as a result of financial globalization.

-v ' Quality effect refers to increases in efficiency levels as a result of financial globalization. (See Abiad, et al, 2004.

The Quality Effect: Does Financial 1,ibralization Improve the Allocation of Capital'? IMF working paper

wp/04/1 12. . - ~.

Dqnr tn tmt qf Econonlics, University ofNigerin Nsukko 5 of 108

A1 Sc Dr wertcrtron Globalrwd Flnuncd flow^, Cnprtcd niurltet deepenrng, ond Econonllc Growth Nrgenun Experience .- -- - - - - - - . . - -- -- - - - - - - - .. - - . - - - -

and-loayza (2000); and Love (2001); argue: that industries which are more dependent

on external finance grow more slowly than other industries in countries with less A. developed financial markets (whether measured by financial depth or improved

accounting standards); and that in countries with deeper financial sectors, capital i s

better allocated in the sense that it tends to flow to growing industries. FPI leads to

FD which then affects GDP growth through increases in total factor productivity,

rather than through factor accumulation. FD i s associated with a drop in the sensitiv-

i ty of investment to the availability of internal funds (Abiad et al, 2006).

Thus, as the beam of globalisation settles on Nigeria, the following questions are apt

to be asked:

a. Has globalisation brought about increased flow of FPI into Nigeria?

b. Has financial globalisation brought about capital market deepening in Nige-

ria?

c. Has the deepening of the capital market engendered economic growth in

Nigeria?

1.3 OBJECTIVES OF THE STUDY

Generally, this research work seeks to confirm i f the inflow of FPI engendered by GFF

has impacted Nigeria's economic growth positively. However, the following particular

objectives wi l l be pursued:

a. To determine whether increased globalisation 1 financial liberalization has

positive relationship with increased inflow of FPI into Nigeria.

b. To ascertain whether globalised financial flows has engendered capital

market deepening in Nigeria.

' c. To find out i f the stock market deepening precipitated by globalised finan-

cial flows has brought about economic growth in Nigeria.

1.4 STATEMENT OF HYPOTHESES

In line with the preceding objectives, the following hypotheses are formulated:

a. Globalisation has not facilitated increased inflow of FPI into Nigeria.

b. Financial globalisation has not contributed to capital market deepening

in Nigeria.

Drynrtment of l:'cononlics, University yf Nigrrirr Nsukkrr 6 of 108

h1.S~ Dissertation: Clobnlised Fit~uncial,flows, Capital marltet deepening, and Economic Growth: Nigerian Experience ~ ~ .... ~~~ ~.. -

c. Capital market deepening as a result of globalised financial flows has

not brought economic growth in Nigeria.

1.5 IMPORTANCE OF THE STUDY

Some studies have been carried out to show the relationship between financial

deepeningjfinancial development and economic growth (Wallich, 1969; Schmidt -

Hebble, 1994; McKinnon, 1973; King and Levine, 1994; Levine and Zervous, 1998;

Montiel, 1994; De Gregorio, 1998; Schmuckler, 2003; Adiad et al, 2006; and Ndebbio,

2004). One way in which this study is essentially different from them is that it

particularizes on capital market deepening as an aspect of financial sector develop-

ment.

Particularly, the works of Wallich, 1969; De Gregorio (1994); and Ndebbio (2004)

share certain similar features with this study. For instance, the cross country study by

De Gregorio (1998) used indicators based on: lnternational Arbitrage Pricing Model - lAPM - as developed by Levine and Zervous in 1995; lnternational Capital Asset Pricing

Model - ICAPM - also as developed by Levine and Zervous (1998); Gross Capital Flows

Ratio - GFR - developed by Montiel in 1994, but transformed into discrete values; as

proxies for financial integration - FI - (i.e. globalisation), while variables such as:

Bank Credit; Market Capitalization; Total value of Shares Traded in a year; and Stock

Market Volatility were used as proxies for financial deepening (FD). He showed that FI

(FG or GFF) leads to FD of the domestic financial market, and through that channel

foster economic growth.

Though a part of this study investigates the relationship between FI and FD, it differs

from the work of De Gregorio in the sense that it typifies the Nigeria experience

under financial Globalization. Another difference is that this study avoided the use

IAPM and ICAPM as they have some shortcomings. This derives from the observation

that tests of any sort using IAPM require the identification of an adequate interna-

tional factor model, and since such a model is lacking at present, it is not possible to

say whether or not arbitrage pricing relationships hold internationally (Sharpe, 1985).

Also, if international capital markets are completely integrated, a type of ICAPM

might hold, while i f the markets are completely separated different Capital Asset

Pricing Models (CAPM) might hold for each country, but recent researches were

inconclusive on whether international markets are completely integrated or com-

pletely separated (Sharpe, 1985). Hence, IAPM and ICAPM were not used in this work.

. ~ ... - ~ - .. - .

Depprrrmtrnt of Ecoaotnics, Universiv of Nigeria Nsukkn 7 of 108

M S c Dlssertntroii Global~sed F ~ n n n c ~ a l j l o w ~ . Cnp~tol imrXet deepenlng, ond E c o n o i n ~ ~ Growth Niger~an Experience . --A --- - . -- - . -- -

Equally, GFR transformed into discrete flow was considered inferior to GFR in the

continuous mode for the purpose conducting impact analysis. Hence, unlike the work b De Gregorio, this study used GFR in continuous flow to proxy globalisation, and as

such expects a more robust result. Finally, it differs from the work of De Gregorio in

the sense that he (De Gregorio) related GFF to FD, and through that means to growth

- this study first relates GFF to the financial deepening of the external (international)

segment of the nation's capital market (IFD) and from there it i s linked to growth

through capital market deepening (FD).

Similarly, this work can be likened to Ndebbio's work (Ndebbio, 2004) in the sense

that they both analysed the relationship between financial development and eco-

nomic growth. Particularly, Ndebbio (2004) has shown for Sub Saharan African (SSA)

countries that FD leads to economic growth and development. He proxied FD in SSA

M .r countries by the degree of financial intermediation - measured as---", and the

Y

growth rate of per capita real money balances (GPRMB). In this vein also, De Gregorio

used: Credit by the Banking sector to the private sector; market capitalization as a

fraction of GDP - MCAP; total value of shares traded as a fraction of GDP - TVT;

volatility index for the stock market - VOL. to proxy FD. Clearly, these proxies do not

clearly show FD due to GFF; of FPI type equally these proxies are affected by internal

factors and hence would not show FD mainly due to GFF. However this study

uses - FPI

- - , i.e. the ratio of foreign portfolio investment in the external Re a1 Non GDP

segment of the Nigerian capital market to real non oil GDP (IFD) as a proxy for the

+ capital market deepening of the international segment of the Nigerian capital

market. This allows the liberty to specifically look at financial deepening 1 develop-

ment from the perspective of developments in the offshorelinternational segment of

the Nigerian capital market or due to GFF. Also Ndebbio's work was interested in

fineancia( development3 in general while this work particularizes on the effects of

deepening of both the domestic and external segments of the capital market. In

these ways, this study i s different from the works of Ndebbio (2004) and De Gregorio

(1998). It i s equally the first of i t s kind to use stylized facts to link GFF of the FPI

type, to economic growth in Nigeria.

' There is a strict difference between financial sector development (FSD) and capital market deepening (FD). FD is

in fict a subset of FSD. - - -

Department 01 Econonricr. Univer5ify of Nigeria Nsukkn 8 of108

A4.Sc Dissertation: Globalised Financialjlows, Capital market deepening, and Economic Growth: Nigerian Experience ~

Presently, there i s dearth of empirical literature linking FPI to economic growth in

Nigeria; therefore this study would add to empirical literature in this gray area.

1.6 Scope and Limitations o f the Study.

This study i s restricted to analyzing the impact of GFF of the FPI type on, firstly,

capital market deepening in Nigeria and ultimately, on economic growth. In doing

this, our main interest i s mainly the foreign portfolio investment flows to Nigeria.

This means that even though FDI, foreign commercial bank loans, ODA (whether

multilateral or bilateral) were al l mentioned in this study, our analysis mainly

centered on FPI and i t s effects on the capital market and economic growth in Nigeria.

This study i s also limited to some extent due to lack of data. For instance, in model-

ing the impact globalization on FPI flows to Nigeria, available literature show that

Nigerian Sovereign Risk Premium ought to be included as one of the explanatory

variables, but this was not possible due to non availability of data. Use was therefore

made of the size of sovereign national debt. Equally, the non availability of data on

FPI flows into Nigeria for the period 1986 downwards constrained this study to work

from I986 upwards.

~ . ....

Depnrtmenl @Economics, University of Nigerirr Nsrrkkn 9 of 108

M Sc D~ss~.rtutrovr Globnlrred F~nunclal flows Cnpltal 17znrket deepening, and Econonzic Growth Nlgerian Experience - --- - . . - - - -- - - - - --- -

CHAPTER TWO r

LITERATURE REVIEW

2.1. Globalization Finance and Economic Growth.

The ultimate yardstick of a country's economic success i s i t s ability to generate a

high level of production of goods and services for i t s population (Oduh, 2006). In

other words, productivity i s central to societal welfare. Therefore sustained increase

in productivity, i.e. economic growth, i s arguably an issue of primary concern to

economists in both developed and developing countries (Turnovsky, 2000). In fact,

economic theory shows that economic growth can be realized in two ways: increase

in the amount of factors of production; or increase in the efficiency with which those

factors are used. Thus, growth i s induced by the increases in investments (i.e. capital

accumulation) and the efficiency of investments (De - Gregorio, 1998).

There i s growing awareness among economists that capital accumulation plays a vital

role in economic growth. This can be discerned from the Harod - Domar, neo classical

and endogenous growth models (Smith et al, 2003; Aysit and Nil - Demet, 1997; and

Turnovsky, 2000). Therefore in economies where capital i s deficient, economic

growth is most likely to be hampered. In situations where it i s not possible to raise

investment levels due to deficient savings, recourse could be made to foreign inflows

(Baye et al, 2006; Hakkio, 1995). In fact, investment in an open economy i s equal to

the sum of domestic savings, capital inflow and budget deficit. The relation between

investment, capital inflows and domestic savings i s positive, while it i s negatively

related to budget deficits. Therefore, i f there i s no budget deficits and domestic

savings are inadequate, then capital inflows become critical to investment and by

externion to economic growth (Hakkio, 1995).

Thus foreign sources could be a good alternative of filling observed savings - invest-

ment gap in any given economy (Schmuckler, 2003). In this regard, it has also been

observed that foreign inflows can bring about capital formation, and also lower the

cost of capital to firms, especially those with access to the capital market (Schmuck-

ler, 2003; De - Gregorio, 1998). In fact, when international financial flows are

allowed into a country, it helps the functioning of the financial system through:

increased availability of funds; and improvement in the financial infrastructure

/Schmuckler, 2003). Simply put, financial globalization brings about financial sector

MSc Dissertntiori: Globtrlised Firiarzcia/,f~o~:s. Capital nzarlcet deepening, a d dcorzonzic Growth: Nigerian Experience . . .. . ... .- ~~ ~~

~ .. , - ~ -

development (De Gregorio, 1998; Schmuckler, 2003), while financial sector develop-

ment brings about growth (Ardic, Oya Pinar and Damar, H. Evren, 2006). Oks (2001 )

argued that existing finance - growth nexus literature which started with Bagehot

(1873), Schumpeter (191 1 ), Hicks (1969), and Mckinnon (1973) showed that there is a

positive relationship between financial development and growth. This conforms to

later studies on the finance growth nexus by Levine (2005), De Gregorio (1998), and

Levine and King (1994).

International financial flows have its surges closely linked to financial globalisation.

Financial globalisation, besides engendering improvements in the financial sector

infrastructure, brings about the maximization of the benefits of credits; it catalyses

competition in the provision of funds - thereby generating efficiency gains; i t makes

way for the adoption of international accounting standards, thereby increasing

transparency and good corporate governance - brought about by the introduction of

international financial intermediaries and new shareholders who now monitor the

management, which results in pushing the financial sector towards the international

frontier; i t allows the increase in the technical capabilities for engaging in precision

financing to be passed on to local and global markets; stringent market discipline

imposed by financial globalization has consequences not only on the macro-economy,

but also on the business environment and other institutional factors (Stulz, 1999;

Crockett, 2000; and Stiglitz, 2000). Financial globalization brings about financial

development which has a dual effect on economic growth. On the one hand, the

development of domestic financial markets may enhance the efficiency of capital

accumulation. On the other hand, financial intermediation may contribute to raising

the savings rate and, thus, the investment rate. The former effect was first empha-

sized by Goldsmith (1969), who also finds some positive correlation between financial

development and the level of real per capita GNP. In addition, Goldsmith (1969) also

argues that the process of growth has feedback effects on financial markets by

.creating incentives for further financial development.

Nevertheless, it is not deterministic that financial globalization must bring about

economic growth. This i s because of the existence of some puzzles i n international

financial economics - the home bias puzzle i n portfolio investment and the high

correlation between saving and investment within an economy with no or limited

barriers to cross-border financial flows. The home bias puzzle was identified by

French and Poterba (1991), who noted the low proportion of foreign stocks in

--

Depnrtntent o f Economics, University of Nigerin Nsri kkn 1 1 of 108

MSc Dissertation: Globalised Financialjlows, Capital market deepening, and Economic Growth: Nigerian Experience - - portfolio investment compared with the optimal levels suggested by the trade-off.

between risk and return. Investors seem to totally or partly ignore the benefits > associated with the diversification of the sources of risks, as may be achieved through

a wider geographical coverage. As emphasised for example by Obstfeld and Rogoff

(2000) in lssing (2000)) a possible explanation for home bias is the existence of

various forms of transaction costs for cross-border purchases and sales of financial

instruments. However, Tesar, L., and I. Werner (1995) point out that such transaction

costs are unlikely to be very high since turnover in foreign stocks is larger than for

domestic stocks. Hasan and Simaan (2000) focus on information asymmetries. They

show that home bias in portfolios of stocks can be reconciled with theory in the

presence of uncertainty regarding the estimation of returns and risks on foreign

stocks, provided such uncertainty i s higher than for domestic stocks. In some

countries, a further explanation for home bias i s the existence of restrictions on the f

range of instruments which can be held by certain categories of investors, such as

quotas on foreign country exposures of investment funds for example.

Feldstein and Horioka (1980) identified another puzzle. They remarked that, over the

long run, developments in domestic saving and investment rates were highly related

than theory would suggest. Thus, by implication, the financing of investment and the

placement of savings seem not to take ful l advantage of international financing and

placement opportunities. Plethora of explanations have been proffered to clarify the

Feldstein- Horioka puzzle, many are similar to the explanations envisaged for the

home bias puzzle. For instance, Obstfeld and Rogoff (2000) posit that transaction

costs can help explain not only the home bias puzzle, but also the Feldstein-Horioka C puzzle as well as other puzzles i n international economics such as the low cross-

country correlation of growth rates in consumption.

As poir~ted by several authors, however, there i s evidence that, although they s t i l l

exist, the puzzles have become less pronounced over recent years, as net cross-

border financial flows have increased. Specifically, international banking activity has

increased steadily i n recent decades as large banking institutions developed activities

at the global level. In addition, both the amount outstanding of securities issued in

foreign currencies and the amount outstanding of securities held by foreign investors

increased rapidly over recent years. As a result of these developments, there seems

t o be a progressive shift in the average composition of portfolios by currency and

issuer, towards patterns more in line with those suggested by the theory.

- . .

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Some economists have gone beyond how the puzzles play out themselves to actually

say that there is a negative relationship between globalization and economic growth.

For instance, Oks (2001) has pointed out the work of Jappelli and Pagano as

emphasizing the possibility that the relation between financial intermediaries'

development and economic growth can be negative.

Today the endogenous growth theory i s prevailing and the existence of the

relationship between financial sector development and economic growth i s set

beyond doubt by the scientists. The matters of direction, robustness and, of course,

causation s t i l l provoke interest (Oks, 2001).

Finally, five views regarding finance growth nexus debate have been identified by

Levine (1997): first, one of the views attributable to Hamilton, Bagehot, and

Schumpeter, argues that finance ignites growth; a second view traceable to Adam

Smith opines that finance hurts growth; a third view due to Robinson is that finance i s

growth led; a fourth view credited to Lucas avers that growth is finance neutral; and

a f i f th view, mainly canvassed by World Bank and IMF emphasize that finance matter

because there is financial crisis.

Finally, we conclude by deducing that i f finance matters, then GFF being a part of

the financial flows, needed to finance investments, equally matters.

2.2 FOREIGN CAPITAL FLOWS T O NIGERIA: NATURE, TREND AND IMPACT ON THE

CAPITAL MARKET.

Of al l the foreign capital flowing into Nigeria, which comprises of: Official develop-

ment assistance - which could be either multilateral flow or bilateral flow; commer-

cial bank loans; commercial credits - which could be either buyers' credit or suppli-

ers' credit; foreign direct investment; and foreign portfolio investment, foreign

portfolio is totally distinct from the others in the sense that it i s the only type of

foreign capital inflow that passes through the capital market.

L)eprirtnzeat of Ecoaonzics, University of Nigerin Nsukka 13 of 108

MSc Dissertcrtion: Globnlised Finnncial,flows, Capital nzar.ltet deepening, and Econonlic Growth: Nigerian Experience -. -- .... -- ............ .. - .................... .....................

Table 1 - - - -- -

FPI -.-......- - . I -- - -- - - - - --- . . 7 FDI

Table 1 reveals that from 1986 FPI started featuring in the nation's balance of

payment account. From this time to 1997, the volatility of FPI flows has been

high as FPI hovers between positive and negative values. I t is worthy to note

that the period coincide with when the country was characterized by political

instability occasioned by unending transition programme of the Babangida re-

gime, the annulment of the June 12 election in 1993. The short lived Interim Na-

tional Government headed by Chief Ernest Shonekan, the 1993 coup by Abacha

and the draconian style of leadership that characterized Abacha' regime. Within

these periods, net FPI was mostly negative. I t could be argued that the sovereign

risk premium was high for the country. This most likely disturbed the investment

activities of foreign investors. By 1998, with the return of democratic govern-

ance, FPI flow into the country (Nigeria) improved from negative to positive. I t

(FPI) had kept improving that by 2005 the value of FPI has surpassed FDI flow

........ . . . - . . . . . -. . - .... ..-..... - - .. ...

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MSc Dissertation: Globalised Financialjlows, Capital madcet deepening, and Econonzir Growth: N~gerian Experience p--...-.--p.p--. -. .. . . . -.. . -.-.--- ~. - -~.. ..

into the country.

The relative importance of Portfolio investment to a small emerging market like

Nigeria has risen in recent years and this has led to the libralisation and internation-

alization of the capital market. Since the internationalization of the Nigerian stock

exchange, which i s a part of the financial liberalization policy of Nigeria, there has

been increased inflow of foreign portfolio investment into the Nigerian economy

through the capital market (Obadan, 2004). Thus, for Nigeria, the increase in foreign

portfolio investment has been fueled, partly by the process of globalization and the

ensuing deregulation of the capital market. A fact that i s hard to ignore i s that the

stock market i s getting good attention from foreign investors and fund managers with

its exceptionally good returns becoming too good to ignore (Uzor, 2007).

The increase in private capital flows especially foreign portfolio investment has

stimulated an intense debate about the impact of such on an emerging market like

Nigeria. Proponents emphasize the positive impacts of such flows on growth and

financial sector development, while critics express concern about i ts volatile nature.

A common concern however is that economic growth resulting from such volatile

flows is unsustainable and adversely affects the financial sector of the economy.

However, the potential contribution that FPI can make to financial sector develop-

ment and economic growth especially when regulated is enormous.

2.3 DETERMINANTS OF FOREIGN PORTFOLIO INVESTMENT (FPI)

Portfolio investment flow into Nigeria is quite a recent phenomenon. Up to the mid

1980s, Nigeria did not record any figures on Foreign Portfolio investmenred inflow in

her balance payment accounts (Okojie, 2005; Soludo, 2006). The reason for non

participation of foreign investors derives from the non- iberalization and internation-

alization of the country's money and capital markets (NSE, 2006). Thus the interna-

tionalization of the Nigeria Capital Market in 1995 is one of the reasons for enhanced

'in flow of FPI (NSE, 2006).

In Nigeria, the composition of Foreign Portfolio Investment are: Transactions in

bonds, debentures and notes as well as non-direct investor equity, preferred stocks,

mutual funds and investment trusts, also are transactions in money market instru-

ments like treasuring bills (Olisadebe, 1995). Many nations have taken steps to lure

foreign investors by tinkering with their fiscal and monetary policies to create an

.economic climate that is conducive. This is because reformed markets and increased

Ueprtnzent qf Bmnomics, University qf Nigerin Nsrikk(1 15 of 108

AbSc Dissertation: Globalised Fin~~ncial flows, Capital nzarlcet deepening, and Economic Growth: Nigeritm Experience ~ ~

legal protection for foreign investors are very necessary in attracting NPI (Macdonald

e t al, 2006; and Levine, 1995). > Reforms are facilitative of FPI in flow while the pursuit of higher rates of returns is

central to FPI inflow (Dodd, 2004). High rates of return are indicative of enhanced

economic growth. Increasing marginal efficiency of capital leads to increases in

economic growth (Jhingan, 2003). This derives from the Passinette's Profit- growth

model which stipulates that growth could be accounted for by sustained profitability

of economic activities. Thus sustained increases in growth rate can spur inflow of FPI.

Equally a surge of capital inflows into a developing country can be triggered by the

lift ing of restrictions on the capital account, know as capital account liberalization,

and by a policy to privatize what were formerly publicly owned assets such as the

telephone or rail way system (Dodd, 2005; Uzor, 2006). The policy of privatization

opens up avenues of investment for FPI, and availability of such investments could a-

course a surge of capital inflows in a developing country.

Foreign portfolio investment flow is also affected by the risk of changes in exchange

rates and interest rate, otherwise known as market risks (Hackio, 1995). Loss of

investors' confidence triggered by rising external debt, political instability and

extreme instability in macro economic fundamentals could make foreign investors

shun investing in a country (Hackio, 1995; Fitch Soveriegn Rating, 2005; and Dodd,

2004). The size of the sovereign external debt captures these risks and therefore

could be used as a proxy for sovereign risk. When the sovereign risk premium of

nation is high, it becomes difficult to attract FPI and even where it i s attracted; it

would be on unfavouarble terms (Hakkio, 2005).

+ In the view of Mundell (2000), deregulation, privatization and advances in technology

can be the reason for foreign direct investment and equity investment in emerging

markets by firms and household from developed countries. Another factor that cannot

be igtored in attracting FPI i s institutional quality. Foreign investors demand and

extract a high level of discipline on firms, and this i s essential in forming their

decision to invest (Levine, 1999; Schmukler, 2003).

To foster the level of economic growth required to create jobs, raise living standards,

and hasten development, sub Saharan African (SSA) nations need to attract more

foreign capital (McDonald, e t al., 2006). Along this line, many nations have taken

steps to lure foreign investors. They have changed fiscal and momentary policies to

create a more stable economic climate. They have reformed their national markets

and increased legal protection for investment (MacDonald e t a/. , 2006). . . . ~ .. - ..- ... -. . ..... . - . . . . ... . - - . .. -. -. .

l)epcrrtnier~t oj'l:'cononiics, University qf'Nigericr Nsukkn 16 of 108

M Sc Dmermtron Globalrsed F~nancral~7ows, Capital market deepenrng, and Economrc Growth Nrgerran Experrence - - - . - - - - -- --

Besides the twin factors of higher rate of return and policy incentives, other drivers

of FPI inflow exist. Soludo (2006) has identified other factors which attract capital

inflows as macroeconomic stability (especially price and exchange rate stability),

openness and competitiveness of the economy as well as stable political environment

and good infrastructure. UNCTAD (2003) also points to favourable rates of return of

nations as another factor that attracts FPI.

2.4 THE NIGERIAN CAPITAL MARKET: DEVELOPMENT AND REFORMS

2.4.1THE CAPITAL MARKET AND ITS INSTITUTIONS

The capital market is the long term end of the financial market. I t specializes in the

mobilization of medium to long-term funds for investment and development pur-

poses. Transactionary activities in the capital market revolve around issuance and

marketing of shares, bounds and debenture (CBN, 2000). The markets that make up

the capital market are the primary market; and the secondary market.

The Primary Market

In this market are traded new issues of securities. The mode of offer of securities

traded here consists of: offer for subscription: right issues; offer for sale; and private

placements. Most of the dominant mode of issues is equity offer which accounted for

59% of the market i n 1999. Others are: rights issue, which constitute 36.7%; deben-

tures, which make up 3.1%; private placements constitute about 0% of the transac-

tions in the primary market (CBN, 2000).

The Secondary Market

This is the market where existing securities are re-traded. This is made up of stock

exchanges and over the counter markets where securities are bought and sold. CBN

(2000) has noted that secondary market activities have increased over the years. This

'was attributed to the opening of trading floor in more parts of the

Nigerian Stock Exchange (NSE), and the elimination of institutional

impediments to operational efficiency, including foreign investment

also dominates i n this market

The Nigerian Stock Exchange

country by the

and regulatory

flows. Equities

The Nigerian stock exchange evolved from the Lagos Stock Exchange which was

=incorporated in 1960. I t became the Nigerian Stock Exchange (NSE) in 1977 (CBN, .- .. . - - -. - .. - - - .. . .. .

Deyartntent o f Ecortoniics, U~tiversify of' Nigeria Nsukkn 17 of 108

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2000, and NSE, 1998). Since its inception, the NSE has grown to have many trading

floors across the country. These trading floors are i n Lagos; Kaduna; Port Harcourt;

). Kano; Onitsha; Ibadan; Abuja; and Yola. The head office of the exchange is in Lagos

(NSE, 2006). NSE commenced trading with only 19 securities on its floor, however, at

present there over 300 securities being traded on the floor of the exchange (Monye,

2007).

In 1995, the NSE was internationalized with the result that quoted companies can

now access funds from international markets through Global Depository Receipt (GDR)

or American Depository Receipt (ADRs) etc using their shares as the covering securi-

ties (Nigeriabusinessinfo.com, 2001 ).

At present, the NSE has over one 1.5 million individual investors and hundreds of institutional

investors (including foreigners who own 40% - 60% of the quoted companies (NSE, 2006). The

.... NSE is the fastest growing exchange in the world today, with a market capitalization of $61.3 16

billion as at the end of June 2007. Analysts' project that is has the capaeity to hit $100 billion

mark by the end of 2007 (Monye, 2007). Furthermore, the NSE is the most profitable in the

whole world (Abodunde, 2007, and Monye, 2007).

2.4.2 Developments i n the Nigerian Capital Market

Uzor (2007) has noted that some significant developments in the business and

economic environment have led to greater attention and reliance on the capital

market.

Reforms induced by Privatization Policies

Ever since government policy started shifting in the direction of limiting the role of

the state in business activities the reform of the capital market has been a crucial

requirement for creating a viable private sector (Uzor, 2007) some of these require-

ment are in the form of more accounting information disclosure, improved capital

. market infrastructure and product offerings like e-bonus, e-dividend, e-IPOs, and e-

POS. These reforms led to and reinforced further reform in the market.

Universal Banking policy triggered reform in the capital market:

The CBN announced the Universal Banking policy of the Government i n 2000. This

policy initiative was the main starting point of sustaining rapid growth and discarding

institutional distinctions in the banking sector. The policy opened the doors of capital

market business to commercial banks. The result is that the rapid growth in the

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MSc Dissertation: Clobnlised Fintmcitrljlows, Capital nzarket deepening, and Econonzic Growth: Nigerian Experience ~

financial se rv i ce~ indus t r~ found an expression i r i a market set for explosive growth

(Uzor, 2007).

Introduction of the Emerging Market

The Emerging Markets was introduced in April 1985~. NSE in i ts "presentation notes"

states that Emerging Market (formerly second Tier Securities) are the small compa-

nies (upstarts) that are yet to meet all the listing requirements of the NSE. The main

purpose of the Emerging Market is to encourage indigenous entrepreneurs to access

the stock market. In the Emerging market, a company may not be allowed to raise an

amount in excess of W100 million. Under the Emerging market rules; an individual can

own up to 90% of the shares. This adds flexibility to the restriction of an individual

not allowed to own shares in a company in excess of 5% of the company (NSE, 1999).

Thus the Emerging market architecture in the capital market makes it possible to

raise funds for business whose potentials are not immediately known to the public.

Establishment of the Indigenous Quoted group (IQG)

The IQG was formed and established in 1997 by indigenous quoted companies on the

Nigerian stock exchange as a platform for indigenous quoted companies to discuss

issues of common interest (NSE, 2006). Thus it forms a forum for the critique of issues

and developments in the capital market and juxtaposing them against the realities of

the times with the interest of the Nigerian quoted companies paramount. I t is hoped

that this development wi l l lead to synergy and subsequent fine tuning of capital

market policies i n a way that wi l l move our industries forward.

Automated Trading System (ATS) and Electronic processing of share issues.

The ATS is a security arrangement whereby transactions on the stock Exchange are

carrigd out through a network of computers. The ATS was launched in April 27 1999.

I t has facility for remote trading and surveillance (NSE, 2006). The ATM makes it

.possible for dealing members to trade on-line-real-time from their offices. The ATS is

tightly coupled with the CSCS (Central Securities Clearing System). In view of this,

when brokers enter their orders for buy, for instance, the system goes into the CSCS

system to verify i f the account numbers entered by the broker exist and i f the stocks

4 NSE in its 'Presentation Notes' states that Emerging markets (formally Second Tier Securities) are for the small

companies (Upstarts) that are yet to meet all the listing requirements of the NSE. The main purpose of the Emerging

Market is to . encourage - .. indioenous . ._a entrepreneur., . ... .. to . access . . - the stock market. .- ~

~ . .. . . -. - .. . -- .. . .. -. -. . .. ..

Deprrrlnzent of Econonrics, Universily qf Nigerin Nsirkkn 19 of 108

M S c I~isser~tatiot~: Glol~ulised Fiwuncinl,flows. Cnpitcrl~~~rrrliet deepenirzg, and Lconomic Growth: Nigeriur~ hperierzce ~ - ~ " ~ .- ~ ~

are available in the client's accounts. The introduction of the ATS made it possible to

transit from the old system of transacting business in the capital market which i s

t manual (the call over system), to a new system of transacting business which i s

electronic (Nigeriabusinessinformation.com, 2001; NSE, 2006). The electronic system

of transaction made possible by the ATS made it possible for SEC to approve the e-

bonus system in 2004 to replace the issuance of physical certificates for scrip issues

(NSE, 2006, Uzor, 2007).

Introduction of t+3 transaction circle

The establishment of the CSCS made possible the introduction of T+5 on the lSt

March, 2000. T+5 means transaction day plus 5 working days. This was the initial

transaction cycle when the Nigerian Stock Exchange launched the CSCS Limited

(Central securities Clearing System). This has been reduced to 4 days with the

introduction of the T+3 (i.e. Transaction day plus 3 working days). With the estab- *

lishment and introduction of CSCS and T+3 respectively, NSE (2006) notes that the

following benefits stand to be reaped.

1. Reduced settlement cycle; increased liquidity and reduced risk

2. Efficiency i s increased by eliminating errors, and lowering costs

3. The automated system i s able to handle surges in demand

4. Reduction of risk through shortened transaction circle that eliminates

errorslfrauds which could occur as a result of long processing time.

5. Centralization of depository functions, reduces costs and increases effi-

ciency

6. Information can be retrieved and verified at a faster pace

lnvestprs can take advantage of capital appreciation because of the T+3 or same day

settlement cycle.

Introduction of the Trade-Alert Systems

The trade alert i s an automated stockholder alert system that notifies an investor of

transactions in his stocks-usually through a GSM mobiles phone. I t was introduced on

March 24, 2005 (NSE, 2006). The NSE noted that the introduction of the Trade Alert

Systems has brought about the following benefits. !

1) Empowers Investors with a tool for independent monitoring of their in- -

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vestment accounts at the CSCS

2) Eliminates chances of unauthorized transactions in investors' account

3) Reports of stock market activities- Notices of AGMs, quarterly financial

highlights of quoted companies, weekly price movement of stocks, etc.

4) Enhances trading in e-IPOs (electronic initial public offers), e-pos (elec-

tronic public offers) and e-bonus (electronic bonus shares).

5) Improved investors' confidence in the market.

The Big Banking Bang:

A very critical event in the growth process of the capital market happened in

2004/2005. This was as a result of the Banking sector Consolidation exercise. During

this exercise the banks pumped in billions of equities into the capital market. This

created investment opportunities in the capital market. The inflow of new money

from both foreign and domestic investors within the period of banking consolidation

improved the ranking of the Nigeria Capital market as the fastest growins equities

market (Uzor, 2006).

Re-entry of government bonds:

In the 1 9 8 0 ~ ~ issuance of long dated government instruments was suspended. These

long term instruments were re-introduced, and this made the capital market to be

deeper and broader in its range of products.

Support as a Result of Monetary Policy Spill Over

In recent times monetary Policy has achieved a great deal of stability. Monetary

authority's low interest rate policy and the accompanying stability in the liquidity of

the economy resulted in large flows of funds to the capital market as investors move

from money market to capital market.

The return of flight capital

The use of two major regulatory tools has brought about increased the retentive

ability of the capital market in terms of capital flow. For the first time, the economy

in about three decades i s retaining an increased proportion of Nigerian originated

M.Sc Disseriation: Globalised Financiuljlows, Capital nzcrrlcet deepening and Economic Growth: h'igerinn Experience ~ ~ .. ... . .-- ."

financial capital. The first of the policy tools has to do with government effort

against money laundering, which has recorded an appreciable success in stemming

capital flight (Okereke, 2005; and Uzor, 2007).

The second policy tool i s the high level of exchange rate stability achieved over the

past two years. That has closed the opportunity to profit from holding dollar denomi-

nated assets and reconverting to the naira later at depreciated exchange rate. The

developments have added to the stability of financial markets and made available

large sums of capital for investment in the stock market (Uzor, 2007).

This i s a big victory for the Nigerian economy, which i s happening at a time of

sustained rapid economic growth. Government revenue has been a t an exceptionally

high level in the past several years and reasonable stimulatory spending has happened

to raise the level of business activity generally.

A new strength from pension reform

The introduction of a new pension scheme has created a strong flow of investment

capital from retires to the capital market. Retirees leaving the public sector are for

the first time in Nigerian history able to get their retirement benefits within a

reasonable time. The number of such people has increases over the past two years, as

the government privatization machinery gained speed.

The pension reform itself created a new window in capital market operation for

pension funds managers. An estimated 10 million employees are expected to register

with the National Pension Commission [PENCOM] for retirement accounts. This has

- created a huge market for pension funds administrators [PFAs] key actor in a stock

market that have since been virtually absent in the Nigerian market.

Definitely, the presence the PFAs wi l l boost the availability of longer-term invest- *

ment capital in the market and positively impact on institutional investing and

trading in securities. According to Stock Market Guide (2007) an estimated 44300

billion contributed by the public and private sectors are estimated to be currently

under the management of PFAs.

Contributions are estimated at N8-10 billion monthly. Nigeria hasn't had such a long-

term stable fund for a long time. The inflow of huge funds for investment i s clearly

tasking the capital market i n terms of absorptive capacity. The market i s yet to

develop the depth and investment options needed in response to the demand for

D~pcrrtnrer~t of Lcononlio, Utliver~ity of Nigerici N\ukkrr 22 of 108

A1 Sc D I Y S ~ T I L I ~ I O N Globrrl~\ed F117nnc1rrl /lows, C'npltnl ~nurltet deepen~ng, and Economic Growth Vrgermn Expwrence . . - - - - - - - - - - - - - -".-- financial assets under the pension reform. How much of pension funds the capital

market can attract depends on how fast it can create the needed investment charac-

teristics (Stock Market Guide, 2007; and Uzor, 2007).

Investments and securities Act No. 45, of 1999fd

In 1999, the law with which the apex regulatory body in the capital market would

operate was enacted. The law - Act No. 45 of 1999 clearly stipulated the functions

and powers of the Securities and Exchange Commission (Aigbekaen, 2007). Laws are

listed below.

To regulate investment and securities business in Nigeria.

To register and regulate securities exchange, capital trade points futures, op-

tions and derivatives exchange, commodity exchanges and any other recog-

nized investment exchange.

To register securities to be offered for subscription or sale to the public.

To render assistance in all aspects including funding as may be deemed neces-

sary to promote an investor wishing to establish securities exchanse and capi-

tal trade points.

To prepare adequate guidelines and organize training programmes and dis-

seminate information necessary for the establishment of securities exchange

and capital trade points.

To register and regulate corporate and individual capital operators as defined

in section 30 of the Act.

To register and regulate the working of ventures capital funds and collective

investment scheme including mutual funds.

To facilitate the linking of al l markets in securities through modern communi-

cation and data processing facilities in order to foster efficiency, enhance

competition and increase the information available to brokers and investors.

To act in the public interest having regard to the protection of investors and

the maintenance of fair and orderly markets and to this end establish a na-

tionwide trust scheme to compensate investors whose losses are not covered

under the investors protection funds administered by securities exchanges and

. capital trade points.

A 1 Sc D~ssr i~i~tron Globulrsed Ftnirnocll flows, Cap~lal ~izrrrlwt cJ(v,uenrng, and Econonrrc Groii,tll Nrget'rrczn Expet rence . . - - -- - -- -- - - - - - - . - . ?. - .- - - - -

TO keep and maintain separate registers of foreign direct investment and for-

eign portfolio investments. ).

To register and regulate central depository companies and clearing and set-

tlement companies, custodians of securities, credit rating agencies and such

other agencies and intermediaries.

To protect the integrity of the securities market against abuses from the prac-

tices of insider trading.

To act as a regulatory apex organization for Nigeria capital market including

the promotion and registration of self regulatory organizations and capital

market trade associations in which it may delegate it's powers.

To review, approve and regulate mergers, acquisition and all forms of business

combination.

To promote investors education and the training of al l categories intermediar-

ies in the securities industry.

To call for information from an undertake inspection conduct inquiries and

audits of the security exchange unit trusts, mutual funds, capital trade points,

futures, options and derivatives exchanges as well as other intermediaries and

self-regulatory organization in the securities industry.

To call for and furnish to any agency such information discharge of i t s func-

tions.

To levy fees or other charges on any person for carrying out investment and

securities business in Nigeria.

To conduct research into al l or any aspect of the securities industry. b

To prevent fraudulent and unfair traded practices relating to securities indus-

try.

To advice the minister on all matters relating to securities industry.

To disqualify unfit individuals from being employed anywhere in the securities

industry.

To liaise effectively with the regulators and supervisors of other financial insti-

tutions locally and over seas and

- - . - . .

Department of l:'cononrics, lJniversi()~ of Nigeria N t r ~ k h ~ 24 of 108

h./Sc D1wr~tar1o17 Glohtrlr~ed F ~ t i o n c ~ ~ l jlniss Coprtrrl nzarltrt deepening, and Ecanonzrc Growth Nlgerlan Experrence - . - -- - - - - --- - - - - . - - - To perform such other functions and exercise such other powers not inconsis-

tent with the decree as are necessary or expedient for giving full effect to the

provisions of this decree.

M S c Dissertation: Glohnlised I;inancial,flows, Cupital market deepening, and Econon7ic Growth: Nigeritrn Experience --- --- -.. . ... .- . -- -. -. - ..~ - . -. . -. - . . . . - - .- .. .- - -- -. -. . - ... ~ ~ . .~

2.5 Empirical Literature

Empirical findings are as divergent as theoretical views on the growth -- finance

nexus. Many researches come out with different views. Essentially, the discussion

focuses on the link between different aspects of financial development and growth.

For instance, focus could be on different measures of financial intermediately

improvements and growth, or between any of: credit to private sector; different

measures of money supply; and, or the different forms of capital market develop-

ment (Schmuckler, 2003; De - Gregorio, 1998; Ndebbio, 2004). In the context that

capital flows, arising from financial globalisation and integration contribute to

financial development, views are currently being expressed regarding growth and the

various forms of ~lobalised financial flows.

De Gregorio (1998) contributing to the debate in his work on the relationship between

international financial integration and economic growth opines that most recent

literature on the theme emphasize the role of financial deepening on economic

growth, while neglecting the role of international financial integration in

promoting a deep domestic financial market and through that channel fostering

economic growth. Financial integration also permits portfolio diversification,

allowing higher profitability on investment and, hence higher rate of economic

growth. Other empirical findings exist and discussed below:

Schmuckler (2003) i n his work - Financial globalization: Gain and Pain for Develop-

ing Countries - discusses the benefits and risks that financial globalization entails for

developing countries. He opines that financial globalization can lead to large bene-

. fits, particularly to the development of the financial system. But financial globaliza-

tion can also come with crises and contagion. The net effect of financial globalization

is likely positive in the long run, with risks being more prevalent right after countries

liberalize.,So far, only some countries, sectors, and firms, have taken advantage of

globalization. As financial systems turn global, governments lose policy instruments,

so there i s an increasing scope for some form of international financial policy coop-

eration.

Issing, (2000), in his study on "the globalization of financial markets" posits that

globalization i s a process which is not yet finalized and wi l l lead to a world in which

countries and economic areas become more and more interdependent. In some

quarters, the unfolding of the process of globalization has given rise to the view that

central banks are becoming increasingly "powerless". ... the challenges posed to - --

Drprrrtnzent of Ecorlontic\, L'niverri[)l of Nigerin N w h k o 26 of 108

A1 Sc DL\ \rrtrr/ron Glohrrlrwd F~ntr i~rnl f lnw.~, ( '(1p1tal17icr~kef &epenlng, arid Econoimc Growth Nrgeimn Experience .- - - - .

monetary policy by the increasing globalization of financial markets are of two

orders. First, the reactions to monetary policy decisions can be rapid and widespread.

Second, monetary policy needs to take into account structural changes to the

economic environment, in the form of more interdependence amongst economies.

These challenges require clear and honest communication on the part of central bank

and a robust as well as encompassing monetary policy strategy which i s able to cope

with structural economic change. In the context of slobalised financial markets, it i s

of the utmost importance that monetary policy pursues as i t s primary objective the

maintenance of price stability. This i s the best contribution that monetary policy can

make to economic growth over the longer run and wil l contribute to efficient and

stable financial markets.

Ardg O.P., and Damar H.E. (2006), investigated Financial Sector Deepening and

Economic Growth: Evidence from Turkey. The study analyzes the effects of financial

sector deepening on economic growth using a province-level data set for 1996-2001

on Turkey. This period i s associated with a weakly regulated and relatively unsuper-

vised expansion of the banking sector which led to the 2001 financial crisis. Contrary

to findings in previous literature, results indicate a strong negative relationship

between financial deepening both public and private and economic growth. In light

of the developments in the period of analysis, this result i s not surprising, as the main

function of the banking sector at time was to provide financing for the Turkish

Treasury, which channeled these funds to the government-albeit mainly for rent

distribution purposes. However, the study contended that the growth of private

banking sector needs to be examined separately, as government ownership of banks

may distort the development of the banking sector as a whole. Conclusion reached

from the study shows that it i s possible to conclude that financial development may

not always contribute to economic growth, and the conditions under which such a

contribution takes place should be investigated further.

' De Gregorio Jose (1 998), in his work on Financial Integration, Financial Development

and Economic Growth, mainly analyzes the relationship between international

financial integration and economic growth by analyzing empirically the relationship

between financial integration and financial development, and between financial

development and economic growth. . The study notes that recent literature surveyed

in this paper emphasizes the role of financial deepening on economic growth, while

less attention has been paid, however, to the role of international financial integra-

1)eprrrtnrcwt of lkmornicr , Universi(y of Nigerirr Nsuhhr~ 27 of 108

M S c D i ~ ~ e r i t r t r o n Globnloed F mancia1 m low^ C'npitcrl ninrAet dcepenlng, nnd Econoriirc G r o ~ t h i l lgemrn bxperrence - - -- a -- -- - -- - - -- tion in promoting a deep domestic financial market and throush that channel foster-

ing economic growth. The study posits that financial integration also permits portfolio

diversification, allowing higher profitability of investment and, hence, higher rate of

economic growth. Those issues are examined in this paper. In particular, after

reviewing the theory and evidence,

Halac M., Zoido, P., and Schmukler, S.L., (2003) in their work - Financial Globaliza-

tion, Crises, and Contagion - opines that different forces and potential benefits are

pushing towards increasing financial globalization. However, globalization can carry

important risks. Essentially, they reviewed the literature on crises and contagion in

the context of financial globalization, and were able to find out that Countries with

weak fundamentals become more prone to crises when they liberalize their financial

sectors. Furthermore, globalization can also lead to crises in countries with sound

fundamentals, due to imperfections in financial markets or external factors. More-

over, open economies are exposed to contagion via different channels such as real

links, financial links, and herding behavior. S t i l l , in the long run, the net effects of

financial globalization are likely to be positive. The main challenges for policymakers

is thus to manage the process as to take advantage of the opportunities, while

minimizing the risks.

Oks A., 2001, in the study on efficiency of the financial intermediaries and economic

growth in CEEC" presents an analytical discussion and empirical evidence of the

relationship between financial sector development and economic growth among

Central and Eastern European countries. The study notes that theoretical views allow

for the complex relationship between the financial sectors development and eco-

nomic growth. Empirical evidence shows that depending on the time period and sub-

sample the correlation of the financial development with economic growth can be

negative or positive. Using monthly data the causality can run one way or the other,

depending on the particular country.

Abiad, A., Oomes, N., and Ueda, K., 2004, in the paper: "The Quality Effect: Does

Financial liberalization Improve the Allocation of Capital?" documents evidence of a

"quality effect" of financial liberalization on a locative efficiency, which is measured

by the dispersion in Tobin's Q across firms. Based on a simple model, the authors

predict that financial liberation, by equalizing access to credit, reduces the variation

in expected marginal returns. They test this prediction using a new financial liberali-

'zation index and firm-level data for five emerging markets: India, Jordan, Korea,

Depnrltnent of Econonzics, University of Nigericr Nsukkn 28 of 108

iL.1 S t Drs~c.~ l(llI017 (,lohcrlr\cd F~nanc~rc~l Jloivs, ('uprttrl tiitrrAei dcepc~nrng, ctrid Economlca G~~o i v / h Vrgerltrn F~lwiwrrc~r

Malaysia, and Thailand. They find strong evidence that financial liberation, rather

than financial deepening, improves allocative efficiency.

Rybinski, K., (2006), discussing on globalization versus financial markets, concludes

that globalization of financial markets, trade, manufacturing, services and knowledge

i s a great opportunity for the global economy. Owning to this process, the developing

countries may modernize and grow faster than they have ever done before. On the

other hand, both manufactures and consumers in the developed countries take

advantage of the access to the huge global labour market, which makes it possible to

lower the costs of manufacturing, enhance productivity and -- consequently - lower

the prices of many goods and services. Both consumers and producers are also

beneficiaries of globalization of the financial markets, which off a wide range of

products enable a better adjustment of the risk profile and t he expected return or

cost of the preferences of investors and borrowers. Globalization also has i t s draw- -L

backs. It generates new types of risk, which constitute challenges to central banks

and supervisors of financial markets. Globalization of financial markets and the

related rapid growth of turnover i n credit and derivatives, such as CDOs or default

swaps, force a focus on understand, what types of risk are generated in particular

market segments. Such risks should be continuously analyzed by central banks and

supervisory authorities. I t may happen in the future that the social groups which incur

losses in the process of globalization wi l l force the decision-makers to take up

protectionists actions, which may contribute to significant lowering of the future

economic growth through limiting the benefits from international trade. Therefore,

economic policy, especially in countries with a large share in the global product, A should be conducted in a manner that would enable policy makers to avoid the

scenario of protectionism growth. After all, one of the greater threats which are

difficult to evaluate i s the risk of adjustment of global imbalances, especially where

it results from market forces without support from adequate reforms.

Ayhan Kose, M., Prasad, E., Rogoff, K., and Wei, S. , 2003, studied the effects of

financial globalization on developing countries by way of appealing to some empirical

evidence, they concluded that Developing economies' financial linkages with the

global economy have risen significantly in recent decades. However, a relatively

small group of these countries has garnered a lion's share of private capital flows

from industrial to developing countries, which surged in the 1990s. Despite the recent

sharp reversals in such "North-South" capital flows, various structural forces are

l~qmrtr~wrrt of Bcononricr, 1 /niversity of' Nigerin NLsu h krr 29 of 108

M.Sc Dissertatiorz: Globuli.srd Fin~ncia/,flows, Gpi tal market deepening, and Economic Growth: Nigerian Experience -~ -. -. --. ..~. -- ~. ---

likely to lead to a revival of these flows, and to continued financial globalization,

over the medium and long term. They averred that theoretical models have identified F- a number of channels through which international financial integration can promote

economic growth in developing counties. A systematic examination of the evidence

suggests that it i s difficult to establish a strong causal relationship. In other words, i f

financial integration has a positive effect on growth, there i s as yet no clear and

robust empirical proof that the effect i s quantitatively significant. There i s some

evidence of a "threshold effect" in the relationship between financial globalization

and economic growth. The beneficial effects of financial globalization are more likely

to b e detected when the developing countries have a certain amount of absorptive

capital., preliminary evidence also support the view that, in addition to sound

macroeconomic policies, improved government and institutions have an important

impact on a country's ability attract less volatile capital inflows, and on i t s vulner- h

ability to crises. International financial integration should, in principle, also help

countries to reduce macroeconomic volatility. The available evidence suggests that

developing countries have not fully attained this potential benefit. Indeed, the

process of capital account liberalization appears to have been accompanied in some

cases by increased vulnerability to crises. Globalization has heightened these risks

since cross-country financial linkages amplify the effects of various shocks and

transmit them more quickly across national boarders. A type of threshold effect

appears here as well -reductions in volatility are observed only after countries have

attained a particular level of financial integration. The evidence suggests that

financial integration should be approached cautiously, with good institutions and

macroeconomic frameworks viewed as important. The review of the available

evidence does not, however, provide a clear road map for the optimal pace and

sequencing of integration. For instance, there is an unresolved tension between

having good institutions in place before undertaking capital market liberalization and

the notion that such liberalization can itself help import best practices and provide

an 'impetus to improve domestic institution. Such questions can best be addressed

only i n the context of country -specific circumstances and institutional features.

Chalapati Rao, K.S., Murthy, M.R., Ranganathan, K.V.K., 1999 in their study on

foreign institutional investments and the Indian stock market, agreed that to facili-

tate foreign private capital flows in the form of portfolio investments, developing

countries have been advised to develop their stock markets. I t was suggested that

these investments would help the stock markets dir ..... ~

Deprrrtnrerrt of Ecorrontics, Lfr~iveesity qf Nigeria Nsukkn 30 of 108

A//.,'%; Disseriurion: Glolx~lised Fina17cicrlflows, Capitol nmrliut deepening, irnd Econotnic Growth: lVigel.ia17 E.xperienc:e . ..-. - ...~ .. . . . -. . .... .- ~ - .. .. . . ~ ~ . . ~ ~

based on indirectly by compelling local authorities to improve the trading systems.

While the volatility associated with portfolio capital flows i s wel l known, there i s also

a concern that foreign institutional investors might introduce distortions in the host

country markets due to the pressure on them to secure capital gains.

Nissanke, M. and Stein H., 2002, writing on Financial Globalisation and Economic

Development: Toward an Institutional Foundation averred that on the promise of

enormous benefits from financial openness, many developing countries have em-

braced, with open arms, financial globalisation by adopting internal and external

financial liberalisation. Yet, despite the rhetoric of i t s proponents, there i s l i t t le

evidence of enhanced development finance or any concomitant improvement i n

economic development. We critically examine the mainstream theoretical rationale

for financial globalisation and liberalisation as well as their explanations of the

widespread financial instability and crises that have been associated with financial

openness. The paper also draws on broader theoretical traditions to explain the

ubiquity of recent financial crises. Pointing to an alternative more dynamic analysis

of the symbiotic relationships between finance and economic development, we

propose an institutional-centric approach that forms a basis for understanding the

transformation required for financial development. We argue that financial flows can

be seen as a series of domestic and international circuits that intersect among

themselves and with the real flows of commodity and productive resources. Institu-

tionally, each flow has a set of internally concatenating capacities, incentives,

norms, regulations and organizations. For development to occur, financial flows need

to feed into real sector circuits to enhance expansion and accumulation, whilst

national flows need to tap into international flows to complement the speed and

capacity of the domestic flows to feed into the real sector circuitry.

Butkiewicz, J.L., and Yanikkaya, H., (2003) in their study on capital account

openness, international trade, and economic growth: a cross-country empirical

' investigation, investigates the relationship between capital account openness and

growth. Their empirical investigation of the effects of capital restrictions on growth

provides evidence supporting capital account liberalization, especially for developed

countries. They also show that capital restrictions are more likely to reduce the

benefits of foreign direct investment on growth in developing countries. Estimation

results for long-term capital flows demonstrate that countries with higher flows tend

to grow faster, and these results challenge the belief that countries must have

Ikpurtnrent of I:'connntics, Univecti!~ of Nigeric~ N\rrhk(~ 31 of 108

,bl SL U~sse~~fu t~orr Glohal~sed F~rrc~ricrc~lJlo~~s, (-0plt~11 rnnrkef deeperirng, and E L O I I ~ I I I I L G'rowtl~ Nlgerrnn Experirncc - - - - -. - - attained a threshold level of development orhurnan capital to benefit from capital

inflows. Moreover, their results imply a substitute relationship between trade with

developed countries and foreign direct investment inflows.

Agarwal, R.N., (2006), in the study to investigate for India the impact of financial

integration on i t s capital market in terms of growth, volatility, and market efficiency

shows that the primary Indian capital market has grown significantly since the

beginning of capital market reforms in 1992 - 93. The secondary capital market i s also

found to have grown in terms of i t s size and liquidity. Volatility in stock prices i s

found to have declined annually. Industry wise volatility measured by the beta i s

found to be greater than unity in the latter period after reforms mainly in metals and

metal products, cement and, finance and investment industries indicating better

performance of these industries compared to the market. The regression results do

not support the random walk model of market efficiency. >

Levine, R. (2001) in his work on International Financial Liberalization and Economic

Growth, pulls together existing theory and evidence to assess whether international

financial liberalization, by improving the functioning of domestic financial markets

and banks, accelerates economic growth. He suggests that the answer is "yes." First,

liberalizing restrictions on international portfolio flows tends to enhance stock

market liquidity which in turn; enhanced stock market liquidity, and accelerates

economic growth primarily by boosting productivity growth. Second, allowing greater

foreign bank presence tends to enhance the efficiency of the domestic banking

system. In turn, better-developed banks spur economic growth primarily by

accelerating productivity growth. Thus, international financial integration can C

promote economic development by encouraging improvements in the domestic

financial system.

Generally, Levine (2007) had noted that empirical literature on growth finance nexus

show that: stock market liquidity predicts growth and productivity growth; liquidity

does not predict savings; market size does not predict growth; market volatility does

not predict growth; banks and stock markets affect growth- primarily through

productivity- not through private, domestic saving. Other evidences confirm this:

country studies, industry-level studies, firm-level studies, dynamic-panel studies, and

time-series studies. Moreover, impact i s causal, robust, and big.

On the basis of the empirical literature, Levine proffered answers to some questions *

that have been at the center stage of the growth finance nexus debate. Some of the

Depnrfntenl of Economics. 1Jrriversi~~ of Nigerin N ~ u l i h 32 of 108

\/I .% Diuerttrtlon Clohrrlisrd F~n r i no~ i l /low.\. C~lpltoI i~~urXrt d m / ~ ~ l ~ l t I g , and Econonzlc Growth Nigel-larl Experrenr,e

questions are: wi l l a country with a better functioning financial system today grow

faster over the next decades? - ... answer - "yes"; should policy makers place financial

sector reforms high on their agenda? -.... answer- "yes". Levine (2007) also pointed

out some policies affecting finance as: entry of foreign capital; entry of foreign

banks; inflation; regulations; and legal system. Equally, it was pointed out that

capital control liberalization affects stock market due to the fact that it: temporarily

raises volatility - but, this doesn't hurt LR-growth; raises liquidity - which accelerates

Initial financial development affects the impact of subsequent policy reform. Finally,

it was pointed out that better finance boosts growth, while better legal systems

boost finance. Legal systems affect capital markets through: supervision and regula-

tion; information disclosure; and macroeconomic stability. This suggests a strategy

for promoting economic growth. A

M.Sc Dissertation: Globrllisrd Financialflows, Capital nzarket deepening, and Econonzic Growth: Nigerian Experience . .. . . .. - . - . " " ~.., ~ .-

CHAPTER 3

METHODOLOGY

3.1 Theoretical Model Specification

Here, we develop the model of this study from the formal neoclassical model by

incorporating the indexes of capital market (both the external and domestic seg-

ments) deepening into it. Since the simple neoclassical model i s restrictive and hence

exhibits constant returns to scale (CRTS), i t s use would imply that the problem of

convergence would manifest in the study. But our study is predicated on the premise

that there wil l be no convergence otherwise, the motivations for continued inflow of

FPI wi l l no longer hold. This would jeopardize the theoretical consistency of the

model. Therefore, neoclassical model must be used in i t s unrestricted form.

Recall that in the neoclassical growth model, there are four variables: output = Y;

capital = K; labour = L; and knowledge = A. The relationship between these variables

i s specified by the production function:

Y, - / ( K , , A,, I,, ), here time t does not enter directly, but only through K, L, and A.

Output varies over time as the inputs into the production function changes. "A" can

enter multiplicatively to generate any of the following production function:

a. I: = ,/'(K,, A, L, , ) , Here technological progress (TP) i s Labour augmented

(Harrod - Neutral).

b. = , / ' (A, K,, L,), PT i s capital augmenting (Slow Neutral).

c. Y, - A,~(K,, I , , ) , Hicks Neutral, which i s unrestricted.

The models al l assume that the productions function have constant returns to scale

(CRTS), and that the only input variables that are critical are: capital, labour and

knowledge. However, for CRTS to hold, the economy needs to be very large, other-

.wise there might be increasing returns to scale (IRTS)'. Since we are interested in

Nigeria as against the whole world, it becomes plausible to assume IRTS, which means

that compared to rest of the world, Nigeria is a small economy. This implies that the

issue of convergence of research variables to world averages has been ruled out.

Y =z A ~ ( K . 1,): Hicks Neutral. I'hc modcl's cr~tical assumptrons arc: constant rcturns to scale; implying

relatively largc economy because in slnall economy there may thc tendency fbr increasing returns to scale; only K,

. . . . . . .-

Dcpnrtrrzerrt o f Ecorronzics, Utriversity o f Nigerin Nsrrkko 34 of 108

il/l Sc U~~swtutron Glohalrsed Frnanc~nlflows, Caprtal market deepetrrng, and Economrc Growth N~ge~*rntl Expcrlence - . . .- - - - . - . . - - - - - -- . - - - -- - - - - .- -

~ r o m theory, the only critical input variables for the model adopted (i.e. the Hicks

Neutral unrestricted growth model i s adopted) for this study are A, K, and L,

therefore the explanatory variables can only enter the production function through A

which i s the efficiency variable.

Advances in technology ensure that today's productive plant exhibit increasing

returns to scale (IRTS). Therefore it becomes more appropriate to model contempo-

rary economies with the unrestrictedlaugrnented neoclassical model. This study wil l

therefore use the unrestricted 1 augmented neoclassical model adapted in such a way

that the main variables of the study wil l 20 into the model as factors of production

through the efficiency parameter. This conforms to the convention of economists

involved in related growth studies, who have generally acquiesced that some vari-

ables be treated as factors of production by entering the growth equation through

"A" (Wallich, 1969; Kin2 and Levine, 1993; Easterly and Rebelo, 1993; Elbadawi and

Ndulu, 1994; Ndebbio, 2004).

3.2 Derivation o f The Theoretical Model

We therefore develop an unrestrictedlaugmented growth from the aggregate produc-

tion function shown below:

Where,

Y = Output

A = Efficiency parameter

K = Capital and

L = Labour 6

From ( I ) we develop the growth rate expression

ButdK 2: 1 I:: Investment. Note also that:

dl, a. a, i s the share of labour to output growth.

I,

Dtpllciritrrerrt of Econoniics, University o f Nigeriti N.sukkn

M Sc Dlssevtat~on G l o b a l ~ ~ e d F1nar7c1nljlows. Ctiprtrrl ~~znrltet deepening, and Econom~r Growth N~gennn Expe~ m c e - - - - - -- - . - - - . . -

b. a, dK i s the share of capital to output growth. K

C. dA - ['i'; -

- (aK F) 1.e. share of factor productivity (efficiency). A

Adjusting (3) for the economy size, we have:

But A = A(Il+D,FlI,E;'V)e"' .................................................... (5)

I. Where:

IFD = Financial deepening of the international capital market segment of Nigeria

FD = Financial deepenin9 of the capital market as a whole

FV = Other explanatory variables

Adjusting IFD, FD, and FV for economy size and assuming they influence the effi-

ciency parameter, and then we wi l l have:

Equation (8) uses the product rule, i.e.

d(x, y) = y.dx -t xdy

Dividing equation (8) through by A, we can have i t s equivalent in equation (9):

Ad Sc Dlsserratron Globdi.\ed F~nntzc~alJlolvs, Cnp~ttrl /~tnvltet de~penlng and Econonzrc C ' ~ ~ i v t / z N~gerran Experrencc. - - . - - - - - - -

hen putting (4) and (9) together, we have an equation-that i s close to the one

below:

3.3 Choice of Proxies for GFF and Financial Deepening of the Capital market.

Several indicators of financial deepening (FD) of the capital market have been

proposed in literature, and of course, they (the indicators) have been used to proxy . different aspects of the relationship between the FD of the capital market and

economic performance. Initially, the indicators were based on monetary aggregates,

such as M I or M2. However, as argued in De Gregorio and Guidotti (1995)) they may

provide a poor proxy of financial development, since they are more related to the

ability of financial systems to provide transaction services, and not necessarily the

ability of financial intermediaries to channel funds from savers to borrowers. How-

ever, since we are interested in investigating the relationship between GFF and

growth, such aggregates wil l be of l i t t le or no value in this study.

De Gregorio and Guidotti (1994), and King and Levine (1993) use, alternatively, the

ratio of domestic credit to the private sector to GDP as a proxy for the degree of

financial intermediation. I t corresponds to credit granted to the private sector by the

central bank and commercial banks. The main advantage of this indicator over other

monetary aggregates lies in the fact that it excludes credit to the public sector, and

hence represents more accurately the role of financial intermediaries in channeling

funds to the private sector. This measure is, however, only a partial indicator of

financial development. I t i s a good indicator of financial development that occurs

through the banking system, but may be a weak indicator of financial development

that occurs outside the banking system, e.g., stock markets. This weakness may be

more relevant in industrialized countries, which have experienced significant non-

blank financial innovation.

In developing countries, most financial developments have occurred within the

A4 Sc Ursrerttrtlon Globtrlr.\ed t. rnrrn~~trl /low.\, C'tlpttrl nzarltci deepening, and Econoii~rr. Growth N~gerltrn Expermce - -- - - -.

banking system. Nevertheless, the use of CREDIT as indicator of financial develop-

ment does not f i t our purposes of analyzing the role of GFF on growth. t

For the choice of a proxy for GFF~, we settle for the magnitude of gross capital flows

ratio to the GDP (GFR) as developed by Montiel (1994) but wi l l retain the values in

(hpitul it1/10~./ I /('upitul 0utflowl the continuous form. SinceGFIZ = , it measures FI

GI1 P

I ~xpil i i r t I 11n port1 (GFF) in a way similar to how 7 ' 0 0 =- - 1 measures trade degree of

(mJ L

openness.

3.3.1 Other Proxies:

C

Real Rate of Return on Investment i n the Nigerian Capital Market (RRR).

FPI is highly attracted to countries with high rate of return on investment. I t is

assumed that a high rate of return on capital market instruments is indicative of high

profitability level of the real sector economy, and ultimately mirrors a high level of

potential to grow the economy. This is in consonance with Passinetti's profit growth

model7. Chalapati e t al (2004) postulates a positive relationship between FPI and

increasing levels of return on portfolio investment.

3.3.2 Capital Market Deepening (FD), and Deepening of the External Sector of the

Nigerian Capital Market (IFD).

Total value traded of shares (TVT) i n a given nations stock exchange measures the

monetary value of the volume of shares bought and sold i n the capital market. If

this value (TVT) is divided by GDP or market capitalization80f the capital market,

6 We also rcfcr GFl. as financial openness. I Passinatti's model stipulates that there is only one equilibrium rate of profit which is determined by the

natural rate of' growth divided by the capital owner's propensity to save. For instance:

P -. X GIlPg,, . Whcre: is thc ratc of' profit that keeps the system on the dynamic path of

K s c K

fill1 employment, RGDPg,, is natural rate of growth; Sc is the capitalist's propensity to save.

In a given stock marltet, ~narkct capitalization refers to thc summation of thc product of all shares listed on the

1)epnrtnlent of Econonlics, lJniversi[y of Nigeria Nsukkn 38 of 108

kl Sc Dw wrtntron Glohtrlr.sed E'rr~trncrciljloi~~s, C'nprtni nzadtet deepenrng. ~ ~ n d E~ono~rz~c Growth 'Vrgerran Experrence

it indicates the level of liquidity of the capital market. Increasing level of liquidity

in a capital market has been referred to as capital market deepening. Other

measures of liquidity exist, like the ratio of market capitalization to the GDP

called size of the market. This study adopted the liquidity measure for capital

market deepening. This is because literature shows that FPI inflow is highly asso-

ciated with liquidity. The quantum of FPI inflow could be viewed as the portion of

TVT attributable to the activities of foreigners i n the capital market. FPI divided

by the GDP indicates the portion of liquidity of the capital market attributable to

the foreign portfolio inflow.

A new measure is proposed here, and that i s the ratio of FPI to the GDP. Since FPI

is the flow from foreign investors to the capital market and equal to the value of

shares purchased by foreigners, then FPI over the GDP measures the liquidity of

ESNCM related to the size of the economy. This measure is adopted here since it

fits into the purpose of our analysis. Hence IFD - - --- lf '1'1 7V'lV , while FD = - - -

Re a1 non GDP GDY

since we suspect that the capital market must increase in size to absorb the in-

flowing FPI. These are good indicators of financial development (financial deepen-

ing) that occurs through the capital market. Non oi l GDP is used here to specifi-

cally remove the influence of the oi l sector and particularly capture investment

activities in the non oi l s e ~ t o r . ~

3.4 Functional Model Specifications

Four equations wi l l be estimated using the Distributed Lag Models with Error

Correction. The first of the equations models the impact of g lobal i~at ion '~ on the

inflow of FPI into the Nigerian economy. This model wi l l have such explanatory

vatiiables as GFR, TDO, Real Interest Rate - RIR, and the Real Exchange Rate -

REXC, Institutional quality - IQ, Real rate of return on capital market investment -

RRR", and Investment -INV. Although Nigeria Sovereign Risk Premium is impli-

') A major t l ir~~st of government policy in Nigeria is to diversify its economic base and reduce over reliance on oil

revenue. 10 We use globalization to refer to all the forces emanating as a result of financial globalization and financial

integration in Nigeria. I I Kate of return on capital market invest~iients has been noted in literature as one of the main factors responsible for

FPI flows global .~ . .

Urpcrrinierii of l~corrorrtics. Uriiversiiy of Nigeria Nsukko 39 of 108

WSc D~~sertutron G'lnDcrli~ed Frnun~~nljlowr, C'ciprml nzurltet deepening, and Econonuc Growth N ~ g e r ~ n n Experrence - - - - - - --- - - - - - -

cated in literature as one of the factors contributing FPI flows across nations, it is

proxied here by the size of the foreign sovereign debtq2. The regressand is FPI.

The second equation models the financial deepening (IFD) of the external segment

of the Nigerian Capital Market (ESNCM) under the impact of globalised financial

flows (or financial liberalization). The model would have IFD as the regressand,

with regressors such as TDO, GFR, MCAP, Real GDP growth - RGDPg, RIR, REXC,

and IQ.

The third equation models the deepening of Nigerian Capital Market (NCM) under

the impact of globalised financial flows. The model would have FD as the regres-

sand, with regressors such as RGDPg, IFD, TDO, GFR, MCAP, IQ, and INV. The ra-

tionale for this equation is that it measures the whole range of the capital market

deepening in Nigeria even as the external segment deepens.

In the fourth equation, the impact on growth as a result of deepening i n ESNCM is

modeled. The regressand is the growth rate of the real Gross Domestic Product

(RGDP,). I t would have IFD, FD, GFR, FPI, IQ, Mcap, INV, and TDO, as regressors.

3.4.1 Modeling Impact of Globalization on FPI

The model is specified thus:

To eliminate chances of the value of the second moments being too high as to

endang'er numerical accuracy, we adjust (12) to get (1 3):

K K K K K (13)

Equation (13) holds i f and only i f : X , - I(O) and y = 1(0), otherwise

X I = ~ ( d ) and Y, = ~(d) , wherexiis a vector of the explanatory variables i n the

model, and d i s their order of integration. Let us assume that

X I - ~ ( d ) and I: = ~ ( d ) holds, then equation (10) would transform as shown

below:

order of stationarity of each variable.

3.4.1.1 Co Integration Equation

, , - z p % , , i s the linear combination of the co - integrated vectors, X I i s a vector of the co - integrated variables.

3.4.1.2 The Error Correction Model Equation

- Aecmis the error correction mechanism, - - - A i s the magnitude of error cor-

rected each period specified in i t ' s a priori form so as to restore 11,,,y to equi-

librium.

M Sc D i w r t u t ~ o n Globul~sed l. ~ n u n c ~ n l f l o ~ u , C u p ~ t d nzarkel deepening, and Econonlic Growrh Niger~an Exper~ence - - -- -. . . - 3.4.2 Modelinithe ~inancial-Deepening of ESNCM (IFD)

The specification of this model is:

To eliminate chances of the value of the second moments being too high as to

endanger numerical accuracy, we adjust (17) to get (19):

lin I1;D =

a,, + 2 i i n ( a l ~ ~ ~ ~ g , ~ l ) + ~ l i n ( a l , + l ~ ~ ~ , l ~ l ) + tlin(a7.11+ l~Dol ) 1 - 0 = ( I I - 0

K K K K K (19)

Equation (19) holds i f and only if: XI = I(O) and Y, = I(o), otherwise

X I = ~ ( d ) and Y, = ~ ( d ) , where X i i s a vector of the explanatory variables in the

model, while Y, i s the dependent variable, and d i s the order of integration. Let

us assume that X I = ~ ( d ) and Y, = ~ ( d ) holds, then equation (19) would trans-

form as shown below:

order of stationarity of each variable.

3.4.2.1 Co Integration Equation

I Where 77,i: x /i /, 1 i s the linear combination of the co - integrated vectors, X i s

. . .

Departntent c! f Econonzics, University of Nigeria Nsrrkkn 42 of 108

h%Sc Dissertation: Glob~ilised Financialjlows, Capital marker deepening, and Economic Growlhi Nigerian Experience . . ..... .- ........... ........-.. ......................... .

a vector of the co -- integrated variables.

3.4.2.2 The Error Correction Model Equation t

I'

.................................................................. 7 , = &, + 1 577,,1Z1 - i. ecm, , -1- V , I = I

(22)

A ccm i s the error correction mechanism, -- A i s the magnitude of error corrected

each period specified in i t ' s a priori form so as to restore ~jl,,,)l( to equilibrium.

3.4.3 Modeling Financial Deepening of NCM

The specification of this model is:

To avoid chances of the value of the second moments being too high as to endanger

numerical accuracy, we adjust (23) to get (24):

4

lin F'L) =

' I

FZ) - a,, + 2 l i n ( u , l ~ l ~ , ~ , ) + 2 lin(a,,+,GFR, ,- , ) + ~ l i n ( a , , , + , IICDPg, , ) / = I I - I) 1 - 0

Equation (24) holds if and only i f : X , - I ( O ) and 1; = I ( ( ) ) , otherwise

XI = l ( d ) and q = ~ ( d ) , where X I i s a vector of the explanatory variables in the

model, while Y, is the dependent variable(i.e. ti, = I;'ll,), and d i s the order of

integration. Let us assume that X , - I@) and = ~ ( d ) holds, then equation

M Sc Drsxrtatron CloOtrlrsed F ~nanoal f lows, ('aprtal marXet deepenrng, and Econonirc Growth Nrgrrcan Experience - - -. - - -A - - - . - - . -

(24) would transform as shown below:

--

I I Ill I

i s the order of stationarity of each variable. U,, i s the error term.

3.4.3.1 Co Integration Equation

The co integration equation i s given by:

II,,,~, - E c %, , i s the linear combination of the co - integrated vectors, 1 X i s a vector of the co - integrated variables.

3.4.3.2 The Error Correction Model Equation

1'

.. ................................................... qll1 Y, = , - 1 < Z - y ecm, , + U,, (27) /.-I

- yecrn i s the error correction mechanism, - y i s the magnitude of error cor-

rected each period specified in i t ' s a priori form so as to restore q,J to equi-

librium.

3.4.4 Modeling Impact of GFF on Growth rate

Using distributed lag model, with error correction, we model the impact on growth

rate of the deepening i n ESNCM and NCM. This wi l l be done in two steps. The first

step entails using IFD and other explanatory variables, while FD i s excluded. The

second step wi l l include al l the explanatory variables including both IFD and FD. This

wi l l enable the model capture the impact of IFD on growth as the stepwise approach

allows comparing changes i n the coefficient of IFD between when it features alone in

the growth regression equation and when it features with FD. This way, the impact of

globalised financial flows on economic growth wi l l be captured.

Depnrinzerzi of Ecmonzics, fJniversi<y of Nigeria Nsukkn

Rescaling for numerical accuracy, equation transforms to:

A0 -t ~ ~ ~ ~ ( A ~ G F R ( / ) + ~ l i n ( ~ / ~ + / T D 0 ~ ~ ~ ~ ~ ( A ~ ~ ~ + ~ I F D ~ ~ ~ ) 1 = 0 I 0 i 0

+ l i n ( ~ ~ ~ ~ P I ) + 2 i n + I ) - 2 i n ( , REXC, , ) + 1 = 0 1 - 0 I = 0

l i n ( ~ ~ ~ + ~ M ~ p ~ 1-1 l i n ( ~ ~ ~ + I Q ~ , ) t T l in (A , , , , ,INV1 V, i 0 1 - 0 1 - 0

On introducing FD, we get 30 below:

R G D P ~ - F( IKD, IT'D, GFR, DO. IQ,

We re'scale (30) get (31) below

The equation (29) and (30) equally hold i f and only i f : XI = I(0) and Y, - I(o),

otherwise X , = ~ ( d ) and Y, = lid), where XI i s a vector of the explanatory vari-

ables in the model, while i s the dependent variable(i.e. Y, - I;%, ), and d i s the

order of integration. Let us assume that = ~ ( d ) and Y, = lid) holds, then equa-

tions (29) would both transform to equation (30) respectively as shown below:

I,,~Y~ -= A,, + ~ ( A ~ I ~ ~ , ~ X , ) + c,, . X I . I ~ , = I ) A A A (32), where q,,, i s the I I Ill I

order of stationarity of each variable. And E,, is the error term.

3.4.4.1 Co Integration Equation

Following from (30), the co integration equation i s given by:

Where 1),11~ Zr % 1 i s the linear combination of the co integrated I vectors, X i s a vector of the co - integrated variables.

3.4.4.2 The Error Correction Model Equation

" 7

lI l = A,, t ~ ~ q , ~ ~ % ~ - y ecm, , t E;, ......................................................

1-1

(34)

-- qecm is the error correction mechanism, -- cpis the magnitude of error cor-

Depnrtment of t.:conon~ics, University of Nigerin Nsukka 46 of 108

M Sc Dl~scrtatwn Globalrvcd Fwzancral low^^, Ccy~rtal marliet deepen~ng, and E - - - " Nlgct-~nn Expertenue

rected-each period specified in it's a priori form so as to restore rliiiY; to equ-f-

librium.

3.5. Justification o f t he Model

Certain other econometric models are rivals to the Distributed Lag Model with error

correction chosen for this work. The major contending ones are the autoregressive

distributed lag model and the Vector Autoregressive (VAR) model.

The distributed lag model is one of the major work horses in dynamic single - equa-

tion regressions. In the path breaking work of Uwe Hassler and Jurgen Wolters (2005)

on distributed Lag Models (DL), it was shown that the estimation of a co integrating

vector from a DL specification i s equivalent to that from an Error Correction (EC)

model. The DL is a versatile and general model with much to recommend it. From it

we can draw inferences about dynamic behavior in rich detail. These pluses coupled

with the fact that it also performs the function of an ECM, make it preferred to VAR

for this work.

The VAR model performs extremely well i f all the variables are lagged to the same

length. This i s not expected of the variables of this study based on theoretical

expectations. Also because VAR's emphasis i s on forecasting, VAR models are less

suited for policy analysis (Gujarati, 2003) -.- one major aim of this study i s policy

analysis, to analyze i f the policy of allowing FPI into the country i s a pro growth

policy. This implies that the VAR i s not the best tool to use in this circumstance and

shows why Distributed Lag Models w i th Error Correction was chosen for this study.

3.6. Data Required and Sources I Software for Estimation.

Secondary data i s mainly used for this study. They are principally sourced from

Statittical Bulletin of Central Bank of Nigeria (CBN), Statistical Publications of The

National Bureau for Statistics (NBS). The data are Time Series data.

Estimation shall be with the PC-Give Econometric software. This has the capacity to

estimate al l the tests specified in the functional model specification.

M Sc Drssertnt~on Globalrsed Frncincrni flolcs C'rrprtal mnrltet deepenrng, and Econo~n~c Growth N~lgerran Expet lence .-

CHAPTER 4

ANALYSIS AND ESTIMATION OF RESULTS

4.1 Results of Econometric Tests

I t i s common knowledge that macroeconomic variables are usually non stationary and

co integrated and as such can lead to spurious regression. To avoid the so called

"Spurious" regression result, we therefore conduct a unit root test using the Aug-

mented Dickey-Filler (ADF) test.

The results are presented below:

4.1. I a Model 1 : Econometric Tests for Model 1

Table 4.1 : Model1 ADF Unit Root Test on the Quarterly Series

Variable / t-adf

DFPl

DLG FR 1 -11.9680""

DLSvRP

1% critical val

2.5920

2.59

2.5920

2.5920

The result shows that al l the variables achieved stationarity after first differencing;

therefore they are al l integrated of order 1. Consequently, we suspect that the

variables are co integrated and as such proceed to co integration test.

4. I. I b Co-Integration Test

To implement the Engle-Granger co-integration procedure, the linear combination of

all the explanatory variables i s estimated against the dependent variable (FPI) at

their levels form excluding the intercept term. Their residual i s obtained which i s

then subjected to co integration test as shown in Table 2.

-

Dqnrtnzent of Economics, l /niver~i!y of Nigerirr Ntukkrr

M Sc D I S S L ' I . ~ L I ~ I O ~ Globnl~sed Flnancral flows, Cap~tul nznrket deepenrng, and Ecorlomlc Growth Nigerlan Expermce - "- - -- - . -. - -- .-- - - - . .- -. . .. - - -

able 4.2: Results from Co-Integration Test on Model 1 . - . .. -- I t-adf 1 Lag / 5%Critical val l % ~ r i t i c a l val I I

/ Residual / -5.3013'" 1 0 / -1 .%I40

From the table, it i s seen that the residual t-adf exceeds the critical value at both 5%

and 1% taking lag lengths 1; this means that it is stationary and hence co integration

i s established, justifying the use of an Error Correction Model (ECM).

4.1.1 c Econometric Result for Model 1 (Results from Modeling FPI by ECM)

Table 4.3: Estimation Result Summary for Model 2

M.Sc Dissertution: Globnlised Finonciul,Jlows, Copital ntarket deepening, and Economic Growth: Nigerian Expi

47.535 41.212 1.153

/ DLSvRP

R' = 0.709293 F (30, 40) = 3.9852 [0.0000] 6 - 41.2375 DW = 2.01

RSS = 83326.23 27 variables, 80 observations

4.1.2a Model 2: Econometric Tests for Model 2 (Modeling Financial Deepening of

the ESNCM -1FD).

We first take the log of the variables and then execute the unite root test. The result

i s displayed in table 4. The essence of taking the log of the variables i s to remove any

problem of scale effects.

Table 4.4: Model 2 ADF Unit Root Test on the Quarterly Series - -. - - .-

Variable

DIFD

DRGDPg

DRl R

- - -

t-adf 1 I% critical val

. .. - . -. - .- . - .- . - .. . - . - -. -- . .

DLREXC

DLlQ

DLTDO

The variables al l achieved stationarity after first differencing; thus they are al l

integrated of order 1. Co integration test i s then carried out using the Engle-Granger

co-integration procedure. The result i s shown in table 5.

hlSc U i s ~ o r t n l ~ o ~ l C;lobal~red brnnnc~r//low.c, (hpltu/ nztwk~t dccpnrng trn - - - - th Nrgerrnn Expermce .. - -- - - -

Table 4.5: Results from CO-lntegration Test on Mo

Residual

t-adf Lag ( 5%Critical val I 1% crit ical val

The result i n table 5 shows that the residual t-adf exceeds the critical value at

both 5% and 1% on lag length 1. It is therefore stationary and hence co integrated.

This justifies the use of the Error Correction Model (ECM).

4.1.2b Results from Modeling DlFD by ECM

Table 4.6: Estimation Result Summary for Model 2

Variable

Constant

DLMcap

DLTDO 1

Coefficient I Std Error T-VAL

0.4620

3.1960

-1.3760

6 - 1.06366 RSS = 79.197 for 9 variables and 80 observations

.4.1.3a Model 3: Econometric Tests for Model 3 (Modeling Capital Market Deepen

ing (FD) i n Nigeria under Global Inflows).

We adjust for scale effects by taking the log of all the variables. The result is shown

in table 7.

- -

Deprrrtntent of Economics, Utzivcrsity o j Nigrricr Nsirkklr

A / / & D~.sscrtatron Globol~sed F ~ n a n ~ 1 u l j 7 o u ~ ~ , Cnprtnl nmrliet deepening, and Econunzlc Growth Nlgerran Experience - - ---- --- ..-- -- - - -- - -- -- - - - - - - able 4.7: Model 3 ADF Unit Root Test on the Quarterly Series

. -

t -adf 1% critical val -

I

1 DLREXC I I DLGFR - - 1 - - . ..- -- - 1 DLMcap

- --I 1 DLTDO

The variables are all stationary after the first difference; hence they are all inte-

grated of order 1, suggesting they might be co integrated. Co integration test i s

then carried out using the Engle-Granger co-integration procedure. The co inte-

gration result i s shown in table 8.

Table 4.8: Results from Co-Integration Test on Model 3

t-adf ~ a g j-5W ritical val 1 1% Critical val .-

desidual

Residual

Residual

The result in table 8 shows that the residual t-adf exceeds the critical value at both

5% and 1% on lag length 1. This implies stationarity which means that co integration i s

established, justifying the use of Error Correction Model (ECM).

... - ..

Drprrrtnrent of Ecanonrics, [iniversilj~ of Nigerin Nsirkkn

MSc /)i.sserta/ion: Globalisetl Fintrncialflows, (bp i~a l mnrke/ deepening, and Economic Growth: Nigerian Experience . ~ ~- -~ - - - .~ - ". " . ~ - ~ . . ~ ~. .

4.1.3b Results from Modeling FD by ECM

Table 4.9: Estimation Result Summary for Model 3.

Variable

Constant

DRlR

DLREXC 1

DLMcap

RSS = 2.59594 for 17 variables and 80 observations

T-VAL

0.746

3.112

4.936 .- .

5.804

1.885

2.493

.-

2.840

2.679

1.672

-1.681

-3.412

4.1.4a Model 4: Modeling Economic Growth within the context of GFF

I

We adjust for scale effects and subsequently conduct a unit root test. The re-

sult i s shown in table 10.

M S c L)~.c.rertcilron Gloht i l~~ed F~nancrtiljlows, Ccrprt~ll market deepenrilg, and Ctonomrc Growth Niger~an Exporrenw - .-. -. - - - - - -- - - .-

Table 4.10: Mode 4 ADF Unit Root Test on the Quarterly Series

t-adf 1% critical val

The variables are al l made stationary after first differencing; they are therefore al l

integrated of order 1, which suggests they might be co integrated. Consequently, co

integration test i s carried out and the result i s shown in table 11.

Table 4.11 : Co integration Result Test on Model 4

( t-adi - --- - ( Lag I S%Critical val ( 1% Critical val

1 Residual 1 -2.3128** 1 2 1 -1.9440 1 -2.5920

The Engle-Granger co-integration procedure indicates that the residual t-adf exceeds

the critical value at both 5% and 1% on the lag length of 1, thus it i s stationary and

establishes co integration, which justifies the use of an Error Correction Model (ECM).

Deprrrtnlerrt qf Econonzicv, University vf Nigerin Nsnkhn

4.1.4b Results from Modeling DRGDPg by ECM

Table 4.12 Estimation Result Summary for Model 4

Variable

Constant

DlFD 3

DFPl 1

DLREXC 3

DLGFR

DLGFR 3

DLTDO

DLTDO 3

ECM q

R~ = 0.547026 F (22, 57) = 3.1 289 [0.0003] DW - -

6 = 1.85767 RSS = 196.704246 for 23 variables and 80 observations

4.2 Interpretation of Results

From the result presented in model 1, the overall goodness of f i t of the model i s

plausible. This i s evident in the value of R~ which i s 0.709293 indicating that about

71% of the total variation of the behavior of the dependent variable (Foreign portfolio

investment) has been adequately explained by the explanatory variables. The

- -

Depnrtment of 1:cononzics. University of Nigerin Nwhkn 5 5 of 108

M Sc Di~ser~ation: G/oho/iSed Finoncialflo WS, C,'apita/~uzrket deepening ond Ecrn0nuc_Grow~~.; iZi~;rerian Experience -- observed value o f F-statistic shows that i t is significant, i.e. [0.0000] < 0.0500. The

significant nature of the F = statistic reaffirms the validity of the R'. The Durbin-

Watson value (DW) of 2.01 meets the strict requirement:

1.7 .<,OW< 2.2. As such it is significant. The P-values of the variables: Non oil RRR;

RIR; REXC; GFR; Mcap; TDO; IQ; IN; and SvRP al l fa l l outside the region -- 2.0 ( X ( 2.0

and thus are individually statistically significant in a l l or some of their lag lengths.

in n ~ ~ J e l 2, the R2 value of 0.593758 is quite good implying a significant

goodness of fit of the model. The implication is that about 59% of the total variation in the dependent variable (deepening of the ESNCM, IFD) is caused by the

set of the explanatory variables included in the model. The value of F-statistic is such

that [0.0000] <0.0500. This implies that it i s significant. The Durbin Watson value of

1-73 satisfies the criteria 1.7 snw s 2.2 for significance. The individual explanatory

variables of t h e model: RGDPg; RJR; REXC; GFR; TDO; and INV all do not satisfy the

maximum probability of accepting the null hypothesis, i.e. they fall outside the

region-2.0 ( X (2.0. This implies they are significant i n al l or some of their lag

lengths. However, Mcap is not statistically significant although it its coefficient

suggests it is of positive relationship with the inflow of FPI.

In model 3, the value of R~ is 0.680065 which is quite impressive implies a significant

overall goodness of fit of the model. The implication i s that about 68 % of the total

variation i n the dependent variable (capital market deepening-FD) is caused by the

set of the explanatory variables included in the model. The value of F-statistic i s such

that [0.0000] <0.0500. This implies that it i s significant. The Durbin Watson value of

2.20 satisfies the criteria 1.7 _ < L ) K T 1 2.2 for significance. The individual explanatory

variables of the model: IFD; RGDPg; RIR; REXC; GFR; Mcap; TDO; and INV all do not

satisfy the maximum probability of acceptin2 the null hypothesis, i.e. they fall

outside the region- 2.0 ( X (2.0 which implies they are significant in all or some of

their lag lengths.

R~ value in model 4 is 0.547026 which implies a statistically significant overall

goodness of f i t of the model. The implication i s that about 55 % of the total variation

in the dependent variable (economic growth-RGDPg) i s caused by the set of the

explanatory variables included in the model. The value of F-statistic i s such that

Depurtnzenf yf Econontics, liniversity of Nigerin Nsukho 56 of 108

M Sc lji.s.scrtutioi7. Glohcrlisecl Fit7cmc~inl,flow.s, ( 'npitnl mcrrkc.t deepening, crnd Econon~ic Growth: Nigerian Experience .. - . .- ... . --- . .. . ~ ., .. ~~ . ~. .. .... . . ... .. . . ... . . - -. - ~ - -- ... [0.0003]~~0.0500. The implication is that i t is significant. The Durbin Watson value of

2.20 satisfies the criteria 1.7 <I)W < 2.2 for significance. The individual explanatory

3 variables of the model: FD; IFD; FPI; RIR; REXC; GFR; Mcap; TDO; and INV all fall

outside the region of maximum probability of accepting the null hypothesis, i.e. they

fall outside the region -- 2.0 ( X ( 2.0 which implies they are significant in al l or some

of their lag lengths.

From the first regression on the relationship between foreign portfolio investment5,

and GFR, Non oil RGDP, Mcap, RIR, REXC, SvRP, TDO, and INV the result shows that

foreign portfolio investment is positively related to real rate of return on investments

in the capital market - RRR, Real interest rate, market capitalization, and Invest-

ment. On the other hand it is negatively related to real exchange rate, trade degree

of openness and institutional quality in Nigeria. According to the result, a unit

't increase in real rate of return wi l l cause FPI to increase by 2.8973 units, while a unit

increase in investment wi l l cause an increase of 2.447. Though foreign portfolio

investment displays a negative relation with TDO, as shown in model 1 result, it i s not

surprising since it conforms to similar work by Adenikinju, and Alaba (2005) on the

impact of trade liberalizationlglobalization on growth rate of the economy which

indicates that Nigeria is not yet ready for such policy. In a similar study, Prasad et

al., (2007) recently documented the phenomenon of "uphill" flows, under the

influence of globalization, of capital from non-industrial to industrial countries and

this might be the reason why trade openness is negative to FPI flow in Nigeria. The

volatile nature of our exchange rate does not facilitate inflow of FPI. GFR i s positive

implying it aids inflow of FPI. The positive sign of interest rate show that interest 4

rate is beginning to reflect the market rate and there i s no more financial repression

by the government. The negative relationship with the sovereign risk premium of the

countFy is expected since Nigeria belonged to highly indebted poor country (HIPC)

within the period under study. With the debt forgiveness granted to Nigeria, it is

expected that this negative relationship wi l l change in the future. The coefficient of

the ECM shows the long run relationship between the explanatory variables and the

dependent variable. It implies that at every interval, the inherent error owing to the

co integration nature is been corrected to the tune of about 59%.

' 1'0 get its proper impact we took the ratio of net foreign portfolio invest~nent to total value of shares t~aded in the

M S L Dmerlntion Gloh~~lircd Fznanc~aI/lows, ('~rpltal niarXe/ deepcw~ng, and E C O ~ O I ~ I C G~wwtIz N g e r i m Experwncc) - - ~ " " ---.- - -- - - - -

One remarkable feature in the second model, where the emphasis i s on defining the

relationship between IFD and financial globalization and financial integration, i s that A the degree of financial openness (GFR) i s positively related to financial deepening of

the ESNCM. This shows that the policy of financial globalization has impacted posi-

tively in the external segment of the Nigerian capital market. I t i s important to also

note that the growth rate of the real GDP is also positively related to IFD. This i s

somehow expected since the relationship between finance and growth i s bi-

directional. Also market capitalization i s positively related to IFD to such an extent

that a unit increase in market capitalization causes IFD to improve by 3.0050 units.

Institutional quality i s rightly signed by i s not statistically significant. The coefficient

of the ECM shows the long run relationship between the explanatory variables and the

dependent variable. I t implies that at every interval, the inherent error owing to the

co integration nature i s been corrected to the tune of about 75 %. \

In model 3, the emphasis i s on finding out the relationship between capital market

deepening, and financial deepening of the external segment of the Nigerian capital

market (IFD). It i s interesting to note that IFD i s positively related to FD. This shows

that a unit increase in IFD causes FD to increase by 3.112 units. Also a unit change in

the exchange rate causes a positive increase of 0.21457 units i n capital market

deepening. Real interest rate i s positively related to capital market deepening but it

i s not statistically significant. The positive sign of interest rate show that interest

rate i s beginning to reflect the market rate and there i s no more financial repression

by the government. An increase in market capitalization by a unit brings about a

positive change in capital market deepening by 82%. The negative sign of the invest-

A ment variable is not a surprise since capital market deepening i s proxied by i t s

liquidity index. The fact that investment draws liquidity off the capital market means

that increases i n investment funded by funds from the capital market depresses

capita( market liquidity. The coefficient of the ECM shows the long run relationship

between the explanatory variables and the dependent variable. I t implies that at

every interval, the inherent error owing to the co integration nature i s been cor-

rected to the tune of about 55%.

The fourth model focuses on the relationship between economic growth, capital

market deepening, foreign portfolio investment, and globalization. Interestingly,

economic growth proxied by the growth rate of real GDP has a positive and statisti-

cally significant relationship with capital market deepening, financial deepening of

L)q(~rtnwtit of Icononi io , Urriversity of' Nigeria Nsukkrt 5 8 of 108

M S c Dissertntion: C'loh~rlised Finnncitrl,flows, (iipitol n~arliet deepening, and Economic Growth: Nigerian Experience . -. ... ... -... .~. .- ... ..~ . .- - ~~ - .- .~ ~- ~~- -.

the ESNCM, gross capital flow (GFR) - used to proxy financial integration and global-

ization. The result shows that a unit increase in foreign private investment (FPI) wi l l 3 lead to 0.00713 units increase in the real GDP growth of the economy. Also a unit

increase in capital market deepening wi l l bring about 2.92 units increase in real GDP

growth rate, while a unit increase in financial deepening of the (IFD) of the external

segment of the Nigerian capital market brings about an increase of 0.13 units in the

growth rate of real GDP. This finding agrees with the earlier finding in the first

model which shows that foreign portfolio investment has a positive relationship with

capital market development i n Nigeria which i n turn affects growth. Though it i s

theoretically known that FPI has a direct relationship with growth, the expected

transmission mechanism of foreign portfolio investment to the economy (IFD and

capital market deepening - FD) met a priori expectation. For instance IFD has positive

relationship with growth although it i s not statistically significant. The relationship P

between growth and FD i s robust positive and significant. One fact that has emerged

from this study i s that GFF i s positively related to economic growth in Nigeria; and

this relationship i s transmitted through capital market deepening. I t now remains

to verify the direction of causality flow, and this i s done by Granger causality tests in

the next section.

4.3 Granger Causality Tests

The results of the granger causality tests are presented below:

TABLE 4.3.1 Direction of Causality between FPI and Financial Globalization

(proxied by GFR) -- - --- - - -. . .. - - - -- . -- - - -- - - - --. . - - -. - -- -

P - Significance Null Hypothesis 1 I ' - " ~ ~ - I

value 1 Pmb. value

/ I T 1 docs not granger causc G F R 1 3.7329 / 0.5321 1 0.0500 1- *ccspt -

The result above shows that the P-value of 0.3871in the first null hypothesis i s

greater than the significance probability value of 0.0500. Our decision rule would be

to accept the null hypothesis since the P-value falls within the acceptance region. We

therefore say that financial globalization and integration does not granger cause

inflow of FPI. In the second hypothesis, we also accept the null hypothesis and say k that capital FPI does not granger cause financial globalization and integration. This

= finding implies that increases in financial globalization and integration are not the -

Depnrtntenl of Econonticr, Univertitj~ of Nigericr Ntcikhn 59 of 108

M Sc I~rssert~rtrow Globalised Frnancr~rl flows, Ccrprtul wznrket deepewrwp, and Economrc Growrh Nigerlnn Experrewce - . - ---- "- --.- - reason for increasing inflow of FPI, although they (financial globalization and finan-

cial integration) are crucial for smooth flow of FPI. + TABLE 4.3.2 Direction of Causality between FPI and RRR

In table 4.5.2, we reject the null hypothesis that real rate of return (RRR) does not

Null Hypothesis

- - . -- - -- - - -- - - . . . I<RR does not granger cause FPl

granger cause FPI since 0.0003< 0.0500. This finding implies that real rate of return

causes inflow of FPI. We accept the second null hypothesis that FPI does not granger

F-Tab

- - -- -. -. -. 2.371 0

cause improved real rate of return. This result concurs with literature that FPI flows

\ to areas with higher rate of return on investment

Significance

V:Iie 1 Prob. Value - - - -. - - --- - .- . - .. - 0.0003 0.0500

TABLE 4.3.3 Direction of Causality between FPI and Mcap

Decision

- .- - - -. -- Reject

-- --.. - --- - - - - -- - -- / Null Hypothesis Significance ~&&on

Value Prob. Value - - -- --- -

Accept

In table 4.5.3, we accept the null hypothesis in the first case since i t s P- value of

0.0800 i s greater than the significance probability value of 0.0500. The second null

hypothesis is also accepted since P = 0.9803 > 0.0500. This finding implies that

market capitalization does not granger cause foreign portfolio investment. I

TABLE 4.3.4 Direction of Causality between IFD and RGDPg

Null Ilypothesis * - . -- -. - . . . . - - - IFD does not granger cause RGDPg -- - RGDPg IFD

In table 4.5.4, we reject the null hypothesis in the first case since i t s P - value of

0.0014 is less than the significance probability value of 0.0500. The second null

hypothesis is equally rejected since the P value = 0.0000 < 0.0500. This finding

implies IFD granger causes RGDPg and that RGDPg also granger causes IFD. Hence

there is a two way causality flow between RGDPg and IFD.

1 IlGDPg dbcs not granL1- 'LI calls 1

. - -- . -. Null 11~~othes i s

HI does not granger cause RGDP~

In table 4.5.5, we reject the null hypothesis in both cases since their P- values of

0.0008 and 0.0039 respectively are both less than the significance probability value of

0.0500. This finding implies FD granger causes RGDPg and that RGDPg also granger

causes FD. Hence there i s a two way causality flow between RGDPg and FD.

TABLE 4.3.6 Direction of Causality between IFD and Mcap

I?- tab

3.1223

I I 1 1

In table 4.5.6, we accept the null hypothesis in the first case since i t s P- value of

0.8102 i s greater than the significance probability value of 0.0500. The second null

hypothesis i s rejected since the P value = 0.0319 < 0.0500. This finding implies Mcap

granger causes IFD. Hence changes i n the market capitalization of the capital market

bring about changes in the deepening of the external segment of the capital market.

TABLE 4.3.7 Direction of Causality between FD and IFD

P - -

Value .- - - - "

- - -

P - Significance ~ e c i s i o n

Value Yrob. Value

78 0.0033 0.b500 - Reject

In table 4.5.7, we reject the null hypothesis in the first case since i t s P- value of

0.0033 i s less than the significance probability value of 0.0500. The second null

hypothesis i s accepted since the P value = 0.40134 < 0.0500. This finding implies IFD

signiiiEiice

Prob. Value

granger causes FD. Hence changes in the financial deepening of the external segment

Decision

--

of the capital market bring about changes in capital market deepening of the capital

market.

Reject 0.0008

. . . . - - . -

1)epirrtmertt of'Eco/~ornics, llrtiversity of Nigeria Nsrrkkir 61 01'108

0.0500

n/l Sc Drwertntlon GloDd~sed finuncrd jlows, Chp~tal/nnr/tet deepenrng, uund Econo~nlc Gro~t th Nlgc~rlun Experrencc - - -- " - - -. . . . -. - - - -- - -

4.4 Other ~conomet ric Tests

Multicollinearity Tests: Tests for multicollinearity were conducted for the

models. The results showed that the correlation coefficients were low, con-

firming the absence of a significant level of multicollinearity. In fact the Barry

and Feldman (1985) criteria of X , _< 0.80on multicollinearity was met.

Normality Test for Residuals: The results of this test for the models revealed

that the Chi - Square normality Test for models' data showed that the error

term distribution is significant at 5 and 1 % levels

Heteroscedasticity Tests: Results from tests showed that Heteroscedasticity

error tests and the functional form tests are significant at 5 % and 1 % levels

(see appendix B)

Error autocorrelation Tests: Results show that over lag 1 to 3, Chi - Square

and F - Form measures are significant at 5 % level only.

1)epnrftrlent of Bcononlic.s, University vf Nigerin Nsukktr

A4,Sc Dissertcition. Globulised Financia1,flows. Ccipitalmurltet deepening, and Economic Growth: Nigerian E.~perience ................. ....................... ... .......... ..... . . . . . . . . . . . . . . . . .......

CHAPTER 5 SUMMARY, CONCLUSION AND RECOMMENDATION

$- 5. I Summary of Findings

This study focused on foreign private investment among other forms of global finan-

cial flows. This i s because, of all global flows, it i s only the FPI that needs the

framework of capital market to transmit from one part of the globe to another.

Results from the regressions show that FPI inflow into the Nigerian economy is mainly

caused by the existence of relatively superior real rate of returns in Nigerian capital

market. I t i s important note that a total of $2 Billion was invested in the Nigerian

Capital Market as FPI by foreign investors in 2005 alone signifying renewed interest in

the Nigerian economy by this class of investors, which in turn confirms the assertion

by the International Finance Corporation (IFC) that the Nigerian Stock Market i s the

most profitable globally.I3 The general finding regarding determinants of FPI inflow i s b

summarized in chart 1.

The report of the result above i s in consonance with the views of: Chalaplati (1999);

Dodd, (2004); and Schmuckler, (2003) who averred that FPI tend to flow to areas that

promises higher return to capital.

l 3 Table 5.1 Annual rate of Return on Stock Investments in NCM -- . - Average annual return 1

Source: Abodunde, T. and

- . --- - Annual min. return

I L. Udochukwu, 20

- - . Annual max. returr

Deprtnzent of l:'conon~ics, University of Nigerin Nsrrkiio 63 of 108

ALSc Il i .r.se~~lc~tion: G1ohtrlisc:d l- ' i~ia~icial/ low,s, ( 'n [~ i ln l ~rirrrkel dwpctl ing, and Ec,onomic Growth: Niyerinn Ekpericnce . . . . . " ..... . .... ""." ...... ~

Chart 5.1 : Determinants of FPI inflow in Nigeria

Financial openness (GFR)

Institutional Quality (IQ)

Market capitalization, sovereign risk premium (proxied by size of sovereign foreign

debt), real exchange rate, and level of institutional quality have rather impeded

inflow of FPI than facilitated it. On the other hand: investment (INV); real interest

rate (RIR); and level of financial openness (GFR) have facilitated inflow of FPI, while

trade openness does not matter. We therefore conclude that globalization has aided

(facilitated) the inflow of FPI into Nigeria. Financial globalization i s not the root b

cause of FPI inflow, but it facilitates it.

With the inflow of FPI, there i s financial deepening of the external segment of the

Nigerian capital market (IFD). This deepening of the external segment of i s facilitated

by the forces of financial globalization and integration. Also, institutional quality and

market capitalization aid deepening of the ESNCM, while effects of trade degree of

openness and interest rates are not significant. Exchange rate effects have been

negative on the deepening of the external segment of the capital market. See chart

A/[,& Disserfntiun: Globnlised Firmncialjlows. Copilnl mnrltet decpcning, aizd Econonlic Growth: Nigerian Experience .- ~. ... - - - -...--..------.-p-.-....

Chart 5.2: Effects of factor changes on financial deepening of ESNCM

The deepening of the international segment of the Nigerian capital market (IFD) and

growth rate of real GDP cause deepening of the capital market. Financial openness,

market capitalization, and real interest rate facilitate financial sector development.

On the other hand, the level of institutional quality impedes the deepening of the

capital market for the period studied. Other variables like: trade degree of open-

ness; investment and; real exchange rate are statistically not significant and hence

could be ignored.

M S c Disserfafion: Globalised Financic~I,flows, Capital nmrlcet deepening, and Econonzic Growth: hligcrian Experience - . .. - . ... - --

Chart 5.3: Effects of factor changes on capital market deepening.

Trade openness 0:) I I Size (Mcap)

Real Exchange rate P C )

Institutional Quality OQ) I Financial openness (GFl2)

The findings of this study support finance growth nexus. Increases in financial

deepening of the international segment of the capital market, and capital market

deepening cause the growth rate of the real GDP to increase. However foreign

portfolio investment, market size, investment, financial openness, institutional

quality, and trade degree of openness facilitate increases in the growth rate of the

real GDP. The level of institutional quality i s not facilitating real GDP growth; in fact

it has a negligible impact. Real exchange rate equally has negligible influence on the

GDP growth rate. See chart 4.

M.Sc L)isserrrrrion: Glohalised Finnncitrl~flows, ('crpital t l ~ r l i e f deepening, and Econolnic Growth: Nigerian Experience .. . .. . .. - .. .. -. . " . . . . .. .... . ~ ..-. -. ... - . . . . .- --. .- .

Chart 5.4: Effects of factor changes on the growth rate of real GDP.

s u e (map)

Real Exchange rate (REXC)

Financial openness (GFR) I

Trade openness 0 0 )

5.2 Conclusion I

There i s remarkable flow of foreign portfolio investment in Nigeria, in the past few

years, and that has stimulated an intense debate about i t s impact on financial sector

development (capital market development and economic growth. While proponents

emphasize the positive impacts of such flows on growth and financial sector devel-

opment (capital market development), critics express concern about i t s volatile

nature which can result in crisis and contagion. This study observes that there has

been remarkable improvement in our financial sector as well as increase in the rate

of economic growth and wondered i f foreign portfolio investment inflow within the

context of globalization have been responsible for these positive developments.

Results reveal of this study that FPI i s specifically attracted by superior rates of

return. However, the existence of superior rate of return alone i s not sufficient to

. .

Depcrrtnwwl of' Econoniics, U~riversit.y of Nigerin Nsukkn 67 of 108

M Sc Dl.\serlrrtlon Glolml~red F ~ n a n ~ ~ a l jlows, Cnp~tal m u i d ~ t deepenmg, nisd E~ono~nrc Growth ,Ylgerrnn I<xperrence - - . - - . - .. - -

trigger sustained inflow. other factors--like degree of financial openness (financial

globalization and integration); size of the capital market; low level of sovereign risk + premium; and sound macroeconomic fundamentals (stable interest, and exchange

rates) are critical i n facilitating the inflow. The inflow of FPI causes the financial

deepening of both the foreign and domestic segments of the capital through quantity

and quality effects. The deepening of the capital market14 then causes economic

growth.

To sustain economic growth, efforts should be made to ensure continuing profitability

of the economy, as this would encourage more investment by business units. To raise

more funds for investment, more equity stocks are issued by the business units which

ultimately raise market capitalization and market size of the capital market which all

leads to capital market deepening.

\ Increases in investment opportunities like that obtained during init ial public offers

(lp0s)15 in a profitable and growth sustained economies facilitate surges i n FPI inflow.

FPI inflows when it flows through the secondary market raises capital market liquidity

and market capitalization through increases i n asset prices, on the other hand i f it

flows through the primary market raises market capitalization and hence market size.

Both size and liquidity increases improve capital market development positively.

Thus, there i s a two way causality link between economic growth and capital market

deepening and generally finance. See chart 5. So the results of this study i s in line

with the finance growth - nexus earlier pointed out by Hamilton, Bagehot, and

Schumpeter Levine (1 997), Oks (2001 ), and Ndebbio, (2004).

' I Capital market deepening is an aspect of financial sector development. +

15 In growing economies these opportunities rnostly are at the behest government privatization programs and

E r i ~ r y market a

Dep(rr1nteril of' Econoniics, llriivrrsity of' Nigrrin Nsctkkn 68 of 108

IISc l)~c.\ertatrovr C;loh~rlr.\ed F I M N I I C I L I / / ~ O W I CCII)I~CI/ n~nrltet deepenmg, uvrd Ecovronlrc Growth Ngerlun Experretrce - - -. - -- - - -

chart 5: Global Financial Flows - channels and Their Consequences

On the whole the current wave of globalization has facilitated an increase in inflow

of FPI into Nigeria. The increased inflow of FPI has contributed to financial deepening

of the external segment of the Nigerian capital market which in turn has contributed

in granger causing capital market deepening of the Nigeria capital market. Capital

market deepening granger causes economic growth i n Nigeria which also granger

causes further capital market deepening. Thus the ensuing circular flow between

capital market deepening and economic growth reinforces each other. This means

that capital market deepening in Nigeria and economic growth lead each other. This

finding conforms to the two way direction causality flows between finance and 4

growth as canvassed by King and Levine (1993), and De Gregorio (1998).

We therefore conclude that GFF (of the FPI type) inflow has increased within the

period under review; this has facilitated the deepening of the capital market which

brought about economic growth.

5.3 Recommendations

A tal l challenge for Nigeria's policy makers in managing capital inflows i s to take

advantage of FPI inflows while minimizing the risks that go it. To meet this challenge,

it i s recommended that policy makers should concern themselves with the following:

1. Strengthening micro economic polices. Policies should be crafted to con-

Drpnrtnzent of Economics, IJtiiverti[y of Nigericr Nsakk(r 69 of 108

M Sc D~ssertrrt~on Gloha/r.sed Flnnnclnl flows, C'uprtol117urXet deepening, und Econonzl~ Growth Nrgermn Erperlence - - - ---- - --- -- - - --- - . . . - . - - .-- - - - - . - - - - - - - - - . - -

solidate gains in microeconomic stability and, i n particular, achieve a ~ u s -

tainable fiscal and monetary policies which are critical to limiting potential

crisis and contagion associated with inflows.

2. Enhancing mechanisms to monitor capital inflows and keep track of out-

flows. Presently, Nigeria does not have ful l information on capital inflows

and outflows. In fact Nigeria should, as a matter of urgency, deploy re-

sources towards gathering reliable and accurate information which would

facilitate development of comprehensive strategies to manage investment

inflows.

3. Financial institutions should hold less market risk so as to be more stable

and less apt to trigger capital flight and contagion to other countries. Col-

lateral requirements, such as those for buying securities on the margin, wi l l

dampen speculative pressures on asset prices. Essentially, this wi l l assist in

preventing systemic failures in markets for derivatives, repurchase agree-

ments and securities lending.

4. Strengthening the supervision of the financial sector. This wi l l help in mit i-

gating the swings i n interest and exchange rates. The regulatory authorities

should monitor the balance sheets of financial institutions

5. Reporting and registration requirements should be improved and strength-

ened not only to help prevent financial fraud but also make markets more

transparent and thereby improve market efficiency in determining prices.

Furthermore, it allows investors and policy makers to detect imbalances in

the economy before they degenerate to crisis proportion.

6. Orderly market Rules should be made and enforced, this is because orderly

b market rules help maintain liquidity and prevent destabilizing market

events. Orderly market rules are inclusive of: requirements on dealers to

maintain bid and ask quotes at all times on a trading day; price limits for

derivatives exchanges; fair credit reporting rules; prohi bitions against

predatory lending and deposit insurance.

7. Strengthening of, and sustaining the current bank consolidation policy,

since it i s known that banking crises can trigger and transmit crisis.

8. The latitude to use capital control measures should be availed to policy

makers. This is in case it so happens that prudential regulations prove inef-

Depnrtnwrrt of Lconomics, University of Nigerin Nwkkn 70 of 108

h.1 Sc Drssertailon G/o/~allsed F~nnntr~rI jlmi s. Cuprtd nz~rrltet deepenrng, and Econolnrc Growth h'igerlan Exper~encc

fective in containing capital surges and excessive risk taking, or where they

fai l to protect the stability of financial system against external shocks, then

strict capital control measures could be used.

9. Since markets work best under competition policy makers must be prepared

to use anti trust laws to prevent forces such as mergers and acquisition

from resulting in industry concentration.

10.There i s also the need for policy makers to shape foreign investment so that

it wil l be best suited for domestic development.

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CHARTS

Chart 1 World Export of Goods & Services

1960 1970 1980 1990 2000 2002

Year

F o o d s ~ennces -. - - - 1

Source: World Bank's Global Development Finance (same for chart 3).

Chart 2 Foreign Direct Investment

1970 1980 1990 2000 2001 2002

Year

L _ _- I - - _. .. - -- --- - - - _ . Source: World Bank's Global Development Finance.

Chart 3: Annual Rate of Return on Investment from Nigerian Capital 1 Stock

Market

Year

-1 --e-AvAR I

AMaxR - - - ljMinn -

- Gee: I:rom data from Nigerian Stock Ilxchange Fact Book & Abodunde, etal, 2007

APPENDIX A

7 Econometric Result Print Out MODEL, 1

---- PcGive 8.00, copy fhr meuller ----

---- session started at 18:30:14 on 8th January 2008 ----

IJnit root tcsls 1987 ( I ) lo 2006 (4)

Critical values: 5%=-1.944 I0/o=-2.592

t-adf B lag t-lag t-prob

Ft'l 2.4130 53.896 2 -2.0038 0.0486

FPI 1.5732 54.927 1 -4.2333 0.0001

FPI -0.28059 60.525 0

Non-oil-GDP - 1.8528 8.4091 2 -4.5264 0.0000

N o n oil--GDP -3.3414"" 9.401 1 1 -3.8524 0.0002

+ Non-oil--GDP -6.3560** 10.191 0

RIR -1.4218 10.227 2 -1.18650.2391

RIR -1.6653 10.254 1 -3.8902 0.0002

K1 R -2.6810** 11.133 0

REXC -2.7633** 27.022 2 -2.26 19 0.0265

IIEXC -2.7074** 27.726 1 -5.9654 0,0000

REXC -2.9803** 33.246 0

GFR -2.7405** 1.0830 2 -5.1545 0.0000

GFR -2.2218* 1.2480 1 -6.2932 0.0000

GFR -2.5524* 1.5227 0

Mcap 3.7143 1.5723 2 -2.125 1 0.0368

Mcap 3.0193 1.6074 1 -4.5108 0.0000

Mcap 1.432 1 1.7934 0

DO -0.0 19371 0.2638 2 -0.99376 0.3235

TDO , -0.084079 9.2631 1 -3.101 1 0.0027

TDO -0.28429 9.7552 0

I Q . 1.4420 7.5005 2 -3.4140 0.0010

1 c? 0.80465 7.9964 I -5.8 171 0.0000

I Q -0.044948 9.5 143 0

INV 3.5444 2062.2 2 -2.6757 0.0091

INV 2.6006 2142.1 1 -5.03860.0000

INV 1.0447 2450.6 0

SVRI' -0.74342 7.5649 2 -1.4036 0.1645

Deprrrtnzerrt of Economics, U n i ~ w s i t y qf'Nigerin Nsukkrr

SvlIP

DFPI

DFPI

DFPI

DNon oil

DNon_oiI

DNon oil

DlIlR

DlIlR

DIIIR

LREXC

LKEXC

LREXC

DLREXC

Dl ,RI:,XC

DLRkXC

LG FII

LG F I<

1,GFR

DLGFR

D1,GFII

DLGFR

1,Mcap

LMcap

LMcap

DLMcap

Dl ,Mcap

DLMcgp

LTDO

LTDO

I ,TDO

Dl .TOO

DL'TDO

DL'I'DO

L1Q

LIQ

LIQ

Deprrrtnzent o f Ecntronzics, University of Nigericr Nsrikka 82 of 108

hl Sc L>rsser.t~rtiorr Cloh~rltsecl I.'rnancrtr/ floivs, T~~pr ta l morltet deepenrng, cind Ecot7ornrc Growth Wrger~an Experience . - . . -.. - - - - - -...-

DLIQ -6.3791** 0.13716 2 -0.92916 0.3557

DLIQ -I l.745** 0.13704 1 3.3322 0 0013

DLIQ -17.556** 0.14554 0

LINV 3 8610 0.18532 2 -2.5151 0.0140

LlNV 3.0883 0.191 54 1 -4 7968 0.0000

LINV 1.8333 0.21658 0

DLINV -7.2046** 0.19958 2 1.4980 0.1382

DI,INV -8.4819** 0.201 16 1 1 1678 0.2464

DLINV -13.793** 0.20162 0

LSvliP -0.73123 0.25398 2 -1.1733 0.2443

L,SvRP -0 68191 0 25459 1 -4.2132 0.0001

LSvfiP -0.59636 0.28029 0

IILSVRP -6.7787** 0.2535 1 2 0.90622 0.3676

D1,SvRP -8.5704** 0.25322 1 1.1476 0.2546

DLSVRP -14.208** 0.25373 0

EQ( 1) Modelling FPI by OLS

The present sample is: 1986 ( I ) to 2006 (4)

Variable Coefficient Std.Error t-value t-prob Partliy

RIR 0.77306 0.607 19 1.273 0.2068 0.0209

LREXC -1 13.16 23.057 -4.908 0.0000 0.2407

LGFR 65.540 19.206 3.413 0.0010 0.1329

LMcap 288.91 32.731 8.827 0.0000 0.5062

LI'DO -52.933 45.120 -1.173 0.2444 0.0178

I ,lQ 63.882 59.533 1.073 0.2866 0.0149

LlNV 9.0923 23.126 0.393 0.6953 0.0020

LSVRP -61.083 18.583 -3.287 0.0015 0.1245

liy = 0,78 1 137 a := 76.5228 UW - 1.06

* liy does NOT allow for the mean *

.RSS = 445035.773 for 8 variables and 84 observations

Residual addcd to database

Residual = Residual values of equation I

Unit root tests 1986 (4) to 2006 (4)

Critical valucs: 5'' - I ,944 19'0 -2.592

t-adf a lag t-lag t-prob

Residual -2.9134** 62.276 1 -3.3553 0.0012

Solved Static I,ong liun cquation FP1 10.773 1 l i l l i - 1 13.2 L,IiEXC t65.54 I,GFK

(SI:) ( 0.6072) ( 23.06) ( 19.2 I) t288.9 LMcap -52.93 L T D 0 4 63.88 L1Q

( 32.73) ( 45.12) ( 59.53) +9.092 LlNV -6 1.08 1,SvRP

( 23.13) ( 18.58)

ECM added to database

WAI,D test Ch1y(8) = 271.25 10.0000] * * Analysis o r lag structure

L a g 0 1 2 3 4 S a FPI - 1 0 0 0 0 0 - I

Std.Err 0 0 0 0 0 0 0 RI R 0.773 0 0 0 0 0 0.773

Std.Err 0.607 0 0 0 0 0 0.607 LREXC -113 0 0 0 0 0 -113

S t d . l l r r 2 3 . 1 0 0 0 0 0 2 3 . 1 LGFR 65.5 0 0 0 0 0 6 5 . 5

Std.Err 19.2 0 0 0 0 0 19.2 1 ,Mcap 289 0 0 0 0 0 289

Std.l?rr 3 2 7 0 0 0 0 O 32.7 1, TDO -529 0 0 0 0 0 -52.9

Std.tlrr 45.1 0 0 0 0 0 45.1 LIQ 63.9 0 0 0 0 0 6 3 . 9

Std.Err 59.5 0 0 0 0 0 59.5 LINV 9.09 0 0 0 0 0 9.09

Std.Err 23.1 0 0 0 0 0 23.1 LSVRP -61.1 0 0 0 0 0 -61.1

Std.Err 18.6 0 0 0 0 0 18.6

'Tests on thc significancc of each variable

variable l:(num,denom) Value Probability Unit Root t-test

RIR F( 1, 76) = 1.6209 [0.2068] 1.2732

EQ(l0) Modelling DFPI by 01 , s

The prcscnt sample is: 1987 ( I ) to 2006 (4)

Variable Coefficient Std.Error t-value t-prob PartRy

Constant -1 7.996 9.5766 - 1.879 0.0662 0.0672

Department of Ecorromics, University qfNigeria Nsukkn

A1 Sc Dlssert~rtron Globnlz~ed Frnnnctul f lm A , Cnpcttrl nztrrAet dcepenrng, n ~ d Econo~i~rc Growth Nrgerlnn Experience

RRR 2 8973 0.7051 1 1.109 0 0002 0 2563

KRRI 3 0.75522 0.60696 1.244 0.2193 0.0306

f DRIR 1.1703 0.4794 1 2.41 1 0.0 183 0.1084

DLREXC -345.79 60 331 -5.732 0.0000 0 4013

DLREXC-I -1 16 73 65.058 -1.794 0.0789 0.061 7

DLREXC 2 -1 1 1 16 67.443 -1.648 0.1057 0.0525

DI,REXC 3 -173.12 74.350 -2.328 0.0241 0 0996

DLGFR 3 41.715 13.135 3 178 00026 0.1709

DLMcap 3 171.33 57.509 2.979 0.0045 0 1534

DL1 DO -195.96 32.91 1 -5.954 0.0000 0.4198

D L T D O I -1 18.26 39.136 -3 022 0 0040 0.1571

D LT DO-2 -125.89 41.169 -3.058 0.00360.1602

DL DO-3 -1 82.84 47.021 -3.889 0.0003 0.2358

Dl ,IQ -21602 62447 -34590.0011 0.1963

DLIQ 1 -1 52 98 75 887 -2 016 0.0493 0 0766 * DLlQ 2 -120.86 77 877 -1.552 0.1271 0.0469

DLIQ-3 -93.868 7 1.704 - 1.309 0.1966 0.0338

DLINV 96.023 39.244 2.447 0.0180 0.1089

DLINV 1 45.956 41.341 1112 027170.0246

DLlNV 2 47.535 41.212 1 153 0 2543 0.0261

DLlNV 3 65.669 38.821 1.692 0 0971 0 0552

DI,SVRI' -209.20 33.000 -6 339 0 0000 0.4506

DLSVRP-1 -58.634 34 236 -1 713 0.093 1 0.0565

DLSVRP 2 -59.986 34.400 - 1 744 0.0875 0.0584

DLSVRP 3 -96.414 35.765 -2.696 0.0096 0.1292

ECM 1 -0.58530 0.099016 -5.91 1 0.0000 0.4163

RSS - 83326.23 for 27 variables and 80 observations

b

Autoregressive-distr~buled lag model of' DlPI on LGFR

Autorcgress~on part has lags 1 to 8

Distributed I,ag part has lags 1 to 8

The present sample is: 1988 (2) to 2006 (4)

Autoregression

I,ag I I ,ag 2 I,ag 3 Lag 4 I,ag 5 Lag 6

Coel'f. -0.6952 -0.235 1 0.2068 0.8082 0.545 1 0.05435

Std.Err 0.1295 0.1666 0.1886 0.1835 0.1563 0.1818

A d .% Dosertcr/~or~ Glohnlised Frnnncral flows, C~ryrtol - .- m n d d deepenrng, nnd Econo~irrc C;r.owth N~gerrun Exper~cnce

Lag 7 I,ag 8

Coeff. -0 44 14 -0 5426

Std Err 0.265 0 3448

Distributed Lag

Constant Lag 1 Lag 2 Lag 3 Lag 4 Lag 5

Coeff. 9.054 4.65 -1 .024 -1.081 2.327 1.991

Std.Brr 7.416 15.1 1 15.92 17.09 17.62 17.61

I,ag 6 Lag 7 Lag 8

Coeff. -7.127 -1 1.03 5.424

Std.Err 17.15 15.89 15.22

RSS -- 134466.1 134 i - 48.1496 Ry 0.530535

F(l6, 58) 4.09655 [0.0000j * *

Granger-Causality test for adding LGFR to DPPI:

l:(S, 58) 2.9104 [0.387l]

Autoregressive-distributed lag model of DLGFR on DFPI

Autoregression part has lags 1 to 8

Distributed Lag part has lags I to 8

'The prcsent sample is: 1988 (2) to 2006 (4)

Autorcgression

Lag 1 Lag 2 Lag 3 L,ag 4 I,ag 5 Lag 6

Coeff. -0 5554 -0 1062 0.2133 -0.5763 -0.1989 0.002454

Std.Err 0.1287 0.1472 0.1478 0.1481 0.1481 0.1484

L a g 7 L a g 8

Coeff. 0. I282 -0.1733

Std.Qr 0.1474 0.l2O3

Distributed Lag

Constant Lag I Lag 2 Lag 3 1,ag 4 L,ag 5

Coeff -0.1239 0.0002068 0.0007397 0 001 18 1 0 0021 5 0.001 097

Std.lirr 0 06121 0.001 058 0.001336 0.001503 0.001462 0 001278

Lag 6 Lag 7 Lag 8

Coeff. -0 0002552 -0 00 1429 -0.002323

Std.Err 0.00 15 1 1 0.002202 0.002865

RSS - 9 24859 1793 i 0.399323 Ry 0.657008

F(16, 58) 6.94377 [0.0000] * *

Drycrrtnwrrl of Ecorwnrics, linivertity of Nigerin N w k h o

M.Sc Disserration: C;lolxllisetf Financinl,jlows, C'~rpiti11 niarltet deepening, and Econon~ic Growth: Nigerian E.~perience . . . . . . . . . . . . . . . . . . . -. . . . . . . . . . . . . . . . . . . . . . . . . . . - ................ -

Granger-Causality test fhr adding DFPI to DLGFR:

F(8. 58) - 3.7329 10.532 1 1

Autoregressive-distributed lag model of DFPI on D1,Mcap

Autoregression part has lags I to 8

Distributed Lag part has lags I to 8

- - 1 he present sample is: 1988 (2) to 2006 (4)

Autoregression

Lag I I,ag 2 I,ag 3 l,ag 4 1,ag 5 Lag 6

Coeff. -0.6247 -0.1246 0.353 1 0.7932 0.5191 0.03616

Std.Err 0.1289 0.161 0.183 0.1783 0.1397 0.1671

Lag 7 l,ag 8

Coeff', -0.45 I4 -0.5746

Std.l'rr 0.2472 0.3224

Distributed Lag

Constant Lag 1 L,ag 2 Lag 3 Lag 4 Lag 5

Coeff. 0.3517 15.68 21.23 33.62 177.5 86.65

Std.Err 6.043 57.51 70.24 71.45 65.58 68.57

1,ag 6 Lag 7 1,ag 8

Coeff. -0.5778 -92.38 23.27

Std.Err 75.1 75.29 64.09

RSS = 1041 14.0016 a :: 42.3683 K y - 0.636504

F(16, 58) ; 6.3476 [0.0000] * *

Granger-Causality test for adding DLMcap to DFPI:

F(8, 58) 6.34760 10.080011

Autoregressive-distributed lag model of D1,Mcap on DFPI

Autoregression part has lags I to 8

Distributed Lag part has lags I to 8

'fhe present sample is: 1988 (2) to 2006 (4)

Autoregression

Lag 1 Lag 2 l a g 3 Lag 4 Lag 5 Lag 6

Coeff. -0.7 1 18 -0.3373 0.0223 1 0.5 I9 0.4596 0.2 102

Std.Err 0.1329 0. I624 0.1652 0.1 5 I6 0.1585 0.1736

Lag 7 Lag 8

Coeff. -0.0367 -0.02842

Std.Err 0.174 1 0.148 1

Distribgted Lag

. . . . .

l)ep(~rlnrent of'Ecor~onzics, ~/niversiljv rvNigerirr Nsukkn

M S c Dissertation: Globalised Financialjows, Capital market deepening, and Econonzic Growth: Nigerian Experience ..

Granger-Causality test for adding DFPl to DLGFR:

F(8, 58) - 3.7329 [0.5321]

Autoregressive-distributed lag model of DFPl on DLMcap

Autoregression part has lags 1 to 8

Distributed Lag part has lags 1 to 8

The present sample is: 1988 (2) to 2006 (4)

Autoregression

Lag 1 Lag 2 Lag 3 Lag 4 Lag 5 Lag 6

Coeff. -0.6247 -0.1246 0.353 1 0.7932 0.5191 0.03616

Std.Err 0.1289 0.161 0.183 0.1783 0.1397 0.1671

Lag 7 Lag 8

Coeff. -0.45 14 -0.5746

Std.Err 0.2472 0.3224

Distributed Lag

Constant Lag 1 L,ag 2 Lag 3 Lag 4 Lag 5

Coeff. 0.3517 15.68 21.23 33.62 177.5 86.65

Std.Err 6.043 57.51 70.24 71.45 65.58 68.57

Lag 6 Lag 7 Lag 8

Coeff. -0.5778 -92.38 23.27

Std.Err 75.1 75.29 64.09

RSS = 1041 14.0016 i = 42.3683 Ry - 0.636504

F(16, 58) = 6.3476 [0.0000] ** Granger-Causality test for adding DLMcap to DFPI:

F(8, 58) - 6.34760 [0.0800]

Autoregressive-distributed lag model of DLMcap on DFPl

Autoregression part has lags 1 to 8

Distributed Lag part has lags 1 to 8

The present sample is: 1988 (2) to 2006 (4)

Autoregression

Lag 1 Lag 2 Lag 3 Lag 4 Lag 5 Lag 6

Coeff. -0.71 18 -0.3373 0.0223 1 0.519 0.4596 0.2102

Std.Err 0.1329 0.1624 0.1652 0.1516 0.1585 0.1736

Lag 7 Lag 8

Coeff. -0.0367 -0.02842

Std.Err 0.1741 0.1481

Distribgted Lag

- -. - - ... . - - --- ... . . -. .. .. .- .- .... . .. -. .- . . - -- - .- . -- - . . . .. - - . . .. .. ~ .. ..

Deprcrlmmr of' Economics, University of Nigeria Nsukka 87 of 108

M.Sc Dissertation: Globalised FinancialJlows, Capital market deepening, and Economic Growth: Nigerian Experience ~ -- -. - --

Constant Lag 1 Lag 2 Lag 3 Lag 4 Lag 5

Coeff. 0.02375-9.092e-005-8.82 1 e-005 -0.0001028 0.0003016 0.0001 14 Y

Std.Err 0.01397 0.000298 0.0003722 0.0004231 0.0004122 0.0003229

Lag 6 Lag 7 Lag 8

Coeff. -1.052e-005-8.815e-005 -0.0002 135

Std.Err 0.0003863 0.0005713 0.0007453

RSS = 0.5563812022 ti = 0.0979427 Ry - 0.494242

F(16,58) = 3.54246 [0.0002] **

Granger-Causality test for adding DFPI to D1,Mcap:

Autoregressive-distributed lag model of DFPI on RRR

Autoregression part has lags 1 to 8

k Distributed Lag part has lags 1 to 8

The present sample is: 1988 (2) to 2006 (4)

Autoregression

Lag 1 Lag 2 Lag 3 Lag 4 Lag 5 Lag 6

Coeff. -0.7056 -0.2419 0.2059 0.8207 0.571 1 0.07745

Std.Err 0.13 15 0.1673 0. I882 0.1 824 0.1592 0.1 845

Lag 7 Lag 8

Coeff. -0.4248 -0.5379

Std.Err 0.2684 0.3483

Distributed Lag

Constant Lag 1 Lag 2 L,ag 3 Lag 4 Lag 5

4 Coeff. -26.1 8.987 -9.67 -8.835 -22.64 -10.48

Std.Err 48.8 38.37 37.63 38.6 40.56 40.87

Lag 6 Lag 7 Lag 8

Coeff. * 7.513 7.396 32.33

RSS - 134512.8429 5 = 48.1579 Ry = 0.530372

Granger-Causality test for adding RRR to DFPI:

F(8, 58) = 2.3710 [0.0003]

Autoregressive-distributed lag model of DFPI on RRR

Autoregression part has lags 1 to 8

Distributed Lag part has lags 1 to 8

.. -- .. . .. . . -. . . . - ..-. .- . - - . ... . .. ..

Department of Bconontics, University of Nigeria Nsukkrr 88 of 108

I M.Sc Dissertation: Globalised Financialflows, Capital market deepening, and Economic Growth: Nigerian Experience -- -- - - . - -- - - -. .

The present sample is: 1988 (2) to 2006 (4)

Autoregression

I Lag I Lag 2 Lag 3 Lag 4 Lag 5 Lag 6

I Coeff. -0.692 -0.2 184 0.2338 0.8473 0.5958 0.09206

Std.Err 0.131 0.1654 0.1858 0.1802 0.1575 0.1852

Lag 7 Lag 8

Coeff. -0.41 81 -0.5361

Std.Err 0.2702 0.3506

Distributed Lag

Constant Lag 1 Lag 2 Lag 3 Lag 4 Lag 5

Coeff. 16.38 1.193 -8.638 -15.38 -36.03 -50.81

Std.Err 10.76 38.35 46.54 48.37 46.64 47.35

Lag 6 Lag 7 Lag 8

k Coeff. -44.98 -41.6 -14.25

Std.Err 49.33 47.08 37.95

RSS = 135922.7408 A - 48.4097 Ry - 0.525449

F(16, 58) ==4.0138 [0 00001 ** Granger-Causality test for adding RKR to DFP1:

F(8, 58) = 1.6329 [0.0873]

MODEL 2

---- PcGive 8.00, copy for rneuller ----

---- session started at 14:05:30 on 29th December 2007 ----

Unit root tests 1987 ( I ) to 2006 (4)

Critical values: %=-I .944 I%=-2.592

t-adf ti lag t-lag t-prob

IFD IFD . IFD RGDPg

, RGDPg RGDPg RIR RIR RIR REXC REXC REXC GFR GFR GFR

? Mcap

Mcap

Depnrfnwnt of Economics, Universiw qf Nigerin Nsukkn 89 of 108

M Sc Drssertation Globolised Financraljlows, Capttal market deepenrng, and Economzc Growth Nigerran Experience - ---- - - --- -

Mcap 1.432 1 1.7934 0

I

TDO TDO TDO DlFD DlFD DlFD DRGDPg DRGDPg DRGDPg DRlR DRlR DRlR LREXC LREXC LREXC DLREXC DLREXC DLREXC

b LGFR LGFR LGFR DLGFR DLGFR DLGFR LMcap LMcap LMcap DLMcap DLMcap DLMcap LIQ LIQ LIQ DLlQ DLlQ DLlQ LTDO LTDO

A . LTDO

DLTDO DLTDO DLTDO

EQ( 1) Modelling IFD by OLS

The present sample is: 1986 ( I ) to 2006 (4)

Variable Coefficient Std.Error t-value t-prob PartRy

RGDPg -0.28329 0.062589 -4.526 0.0000 0.21 01

RIR 0.0054016 0.0098088 0.551 0.5834 0.0039

REXC -0.01 0853 0.0026555 -4.087 0.0001 0.1 783

GFR 0.37129 0.059420 6.249 0.0000 0.3365

.? Mcap 0.19347 0.029682 6.5 18 0.0000 0.3556

I Q -0.001 1677 0.01 5034 -0.078 0.9383 0.0001 - --

Department of Econonlics, University of Nigeria Nsukka 90 of 108

MSc Dissertation: Globalised Financialjlows, Capital nzarltet deepening, and Economic Growth: Nigerian Experience .---.-..------.------.--p--..-..--. ~- ~ -. . -. -... -..

TDO 0.0066838 0.012683 0.527 0.5997 0.0036

* Ry does NOT allow for the mean *

RSS = 124.4309608 for 7 variables and 84 observations

Residual added to database

Residual - Residual values of equation 1

Unit root tests 1986 (4) to 2006 (4)

Critical values: 5%=-1.944 1 %=-2.592

t-adf 5 lag t-lag t-prob

Residual -2.7752** 1 .I235 2 -3.9745 0.0002

Kesidual -5.0266** 1.2242 1 -1.9840 0.0507

b- Residual -8.9814** 1.2465 0

Solved Static Long Run equation

IFD - -0.2833 RGDPg +0.005402 RlR -0.01 085 REXC

(SE) ( 0.06259) ( 0.009809) ( 0.002656)

t0.3713 GFR +0.1935 Mcap -0.001 168 1Q

( 0.05942) ( 0.02968) ( 0.01503)

+0.006684 TDO -0.0 I268

ECM added to database

WALD lest Chiy(7) = 134.09 [0.0000] **

Analysis of lag structure

L a g O 1 2 3 4 5 a

IFD -1 0 0 0 0 0 - 1

Std.Err 0 0 0 0 0 0 0

RGDPg -0.283 0 0 0 0 0 -0.283

S tbEr r0 .0626 0 0 0 0 0 0 . 0 6 2 6

RIR 0.0054 0 0 0 0 0 0 . 0 0 5 4

Std.Err 0.00981 0 0 0 0 0 0.00981

REXC -0.0109 0 0 0 0 0 -0.0109

Std.Err0.00266 0 0 0 0 00.00266

GFR 0.371 0 0 0 0 0 0 . 3 7 1

Std.Err 0.0594 0 0 0 0 0 0.0594

Mcap 0.193 0 0 0 0 0 0.193

Std.Err 0.0297 0 0 0 0 0 0.0297

_IQ -0.00117 0 0 0 0 0-0.00117

-- .. -- . .- . - .. ... .

Deprrrtn~ent of Economics, University of Nigeria Nsukka 91 of 108

M.Sc Dissertation: G1oDrrlisc.d Financialjlows, Capital nlarket deepening, and Economic Growth: Nigerian Experience . .~ ...... . ... . -- ~~ ... . - ~ . -

Std .Er r0 .015 0 0 0 0 0 0 . 0 1 5

TDO 0.00668 0 0 0 0 00 .00668

Tests on the significance of each variable

variable F(num,denom) Value Probability Unit Root t-test

RGDPg F( 1, 77) = 20.486 [0.0000] * * -4.5261

RIR F( 1, 77) = 0.30326 [0.5834] 0.55069

REXC F( 1, 77) - 16.703 [0.0001] ** -4.0869

GFR F( 1,77) = 39.046 [0.0000] ** 6.2486

Mcap F( 1, 77) = 42.487 [0.0000] ** 6.5 182

1Q F( 1, 77) = 0.0060335 [0.9383] -0.077676

TDO F( 1, 77) = 0.27771 [0.5997] 0.52698

EQ(30) Modelling DIFD by OLS

The present sample is: 1987 ( I ) to 2006 (4)

Variable Coefficient Std.Error t-value t-prob PartRy

Constant 0.055891 0.12085 0.462 0.6452 0.0030

DRGDPg-3 0.16552 0.05 1795 3.196 0.0021 0.1257

DRIR--3 -0.014253 0.010355 -1.376 0.1730 0.0260

DLREXC -2.0914 0.73998 -2.826 0.0061 0.101 1

DLGFR 0.1 1665 0.046198 0.525 0.6014 0.0039

DLMcap-3 2.9668 0.98736 3.005 0.0037 0.1 128

DLTDO-1 -0.3741 7 0.62512 -0.599 0.5514 0.0050

DLlQ 0.44346 0.85692 0.518 0.6064 0.0038 A

ECM-l -0.74659 0.098572 -7.574 0.0000 0.4469

RSS = W.20318487 for 9 variables and 80 observations

Autoregressive-distributed lag model of DIFD on DRGDPg

Autoregression part has lags 1 to 8

Distributed Lag part has lags 1 to 8

The present sample is: 1988 (2) to 2006 (4)

Autoregression

Lag 1 Lag 2 Lag 3 Lag 4 Lag 5 Lag 6

Coeff. -0.3202 -0.07428 0.0702 0.1 682 -0.02902 -0.01 506

Sid.Err 0.1 133 0.1244 0.1253 0.1233 0.1063 0.1063

Depnrimenf of fEcononzics. University ?ofNigeria Nsukk~f 92 of 108

MSc Dissertation: Glohalised Financialjlows, Capital market deepening;and Econonzic Growlh: Nigerian Experience . . .. .~. ... - .~ . ., .,

Lag 7 Lag 8

Coeff. -0.02345 -0.01966

Std.Err 0.1064 0.09102

Distributed Lag

Constant Lag 1 Lag 2 Lag 3 Lag 4 Lag 5

Coeff. 0.05289 0.0248 0.01754-0.0008313 -0.3323 -0.1567

Std.Err 0.09892 0.06352 0.07707 0.07852 0.07688 0.08494

Lag 6 Lag 7 Lag 8

Coeff. -0.04405 0.01 3 12 0.3577

Std.Err 0.0873 0.08679 0.07733

KSS = 39.72040532 A = 0.827547 Ry - 0.7708

F(16,58) - 12.1909 [0.0000] **

Granger-Causality test for adding DRGDPg to DIFD:

F(8, 58) = 11.588 [0.0000] **

Autoregressive-distributed lag model of DRGDPg on DIFD

Autoregression part has lags 1 to 8

Distributed I,ag part has lags 1 to 8

The present sample is: 1988 (2) to 2006 (4)

Autoregression

Lag 1 Lag 2 Lag 3 Lag 4 Lag 5 Lag 6

Coeff. -0.6944 -0.2926 0.1635 0.145 0.241 2 0.1449

Std.Err 0.1341 0.1627 0.1658 0.1623 0.1793 0.1843

Lag 7 Lag 8

Coeff. -0.0363 1 -0.2004

Std.Err 0.1832 0.1632

Distributed Lag

Constant Lag I Lag 2 Lag 3 Lag 4 Lag 5

Coeff. 0.006623 -0.26 19 -0.1 772 -0.03258 -0.07814 0.2291

'Std.Err 0.2088 0.2391 0.2626 0.2645 0.2602 0.2244

Lag 6 Lag 7 Lag 8

Coeff. 0.1835 0.0859 -0.007722

Std.Err 0.2244 0.2246 0.1922

KSS = 177.0205 1 17 -= 1.74702 Ry = 0.447433

F(16, 58) - 1.45935 [0.0000]**

-. Granger-Causality test for adding DIFD to DKGIlPg:

. -.-- . . ... . --. -- .~ .-..

Depnrtnlent of Economics, University of Nigeria Nsrrkkn

M.Sc Dissertation: Globalised Finuncialjlows, Chpital marltet deepening, and Economic Growth: Nigerian Experience .- - .- .- - - - - - -. - . . . .- - . - - - . - .- ..

F(8, 58) = 2.93529 [0.0014] **

Autoregressive-distributed lag model of DlFD on DLMcap

Autoregression part has lags 1 to 8

Distributed Lag part has lags 1 to 8

The present sample is: 1988 (2) to 2006 (4)

Autoregression

Lag 1 Lag 2 Lag 3 Lag 4 Lag 5 Lag 6

Coeff. -0.5973 -0.1908 0.21 19 -0.0005732 0.151 8 0.1009

Std.Err 0.139 0.1612 0.1625 0.1548 0.1326 0.1333

Lag 7 Lag 8

k Coeff. 0.02076 -0.1823

Std.Err 0.1344 0.1 196

Distributed Lag

Constant Lag 1 Lag 2 Lag 3 Lag 4 Lag 5

Coeff. -0.1502 1.516 1.628 1.7 4.619 2.14

Std.Err 0.163 1.707 2.032 2.073 1.899 2.067

Lag 6 Lag 7 Lag 8

Coeff. -0.0633 -2.294 0.6678

Std.Err 2.237 2.21 1.844

RSS = 78.27771226 A - 1.16173 Ry - 0.54831 1

F(16, 58) = 4.40044 [0.0000] **

-i Granger-ausality test for adding DLMcap to DIFD:

F(8, 58) = 2.309 [0.03 191 *

Autoregessive-distributed lag model of DLMcap on DlFD

Autoregression part has lags 1 to 8

D'istributed Lag part has lags 1 to 8

The present sample is: 1988 (2) to 2006 (4)

Autoregression

Lag 1 Lag 2 Lag 3 Lag 4 Lag 5 Lag 6

Coeff. -0.6824 -0.352 -0.0421 9 0.5074 0.41 39 0.205

Std.Err 0.141 0.1679 0.1712 0.1569 0.1707 0.1848

Lag 7 Lag 8

G e f f . 0.02295 0.0 173 3

-- - .. - .. . . .- . . . -- - - . . . . . . . -- . ... . .. .. . . . .- . - -. .. - - .. ..

Lkpnrtnzen! of Economics, Universi@ o f Nigerin Nsukkn 94 of 108

M Sc Dlssertatlon Globahed Fmancral flows, Caprtal market deepening, and Econornlc Growth Nlgerlan Experience . . . - - . - - - - - -- .- -- - - -- - - - - - - - - --

Std.Err 0. I826 0.1524

Distributed Lag

Constant Lag 1 Lag 2 Lag 3 Lag 4 1,ag 5

Coeff. 0.02438 0.002399 -0.0013 12 -0.0081 15 -0.006352 -0.01026

Std.Err 0.01347 0.01 148 0.01331 0.01343 0.01279 0.01096

Lag 6 Lag 7 Lag 8

Coeff. -0.006633 0.002416 -0.008583

Std.Err 0.01 101 0.01 11 0.00988

Granger-Causality test for adding DIFD to DLMcap:

b- Model 3

---- PcGive 8.00, copy for meuller ----

---- session started at 3: 1 1 :32 on 4th January 2008 ----

Unit root tests 1987 ( I ) to 2006 (4)

Critical values: 5%=-1.944 1 %=-2.592

t-adf i lag t-lag t-prob FD 2.9493 0.19362 2 -2.3667 0.0205 F D 2.1406 0.19924 1 -4.8991 0.0000 FD 0.63017 0.22640 0 I FD -0.63403 1.2473 2 -2.8856 0.0051 IFD -1.4940 1.3046 1 -4.6708 0.0000 IFD -3.4305** 1.4664 0 RGDPg -0.32135 1.8346 2 -3.4332 0.0010

A RGDPg -0.82379 1.9574 1 -5.5107 0.0000 RGDPg -1.9139 2.2925 0 RIR -1.4218 10.227 2 -1.1865 0.2391 RIR -1.6653 10.254 1 -3.8902 0.0002 RIR -2.6810** 11.133 0 REXC -2.7633** 27.022 2 -2.2619 0.0265 REXC -2.7074** 27.726 1 -5.9654 0.0000 REXC -2.9803** 33.246 0 GFR -2.7495** 1.0830 2 -5.1545 0.0000 GFR -2.2218* 1.2480 1 -6.2932 0.0000 GFR -2.5524* 1.5227 0 Mcap 3.7143 1.5723 2 -2.1251 0.0368 Mcap 3.0193 1.6074 1 -4.5108 0.0000 Mcap 1.432 1 1.7934 0 1 Q 1.4420 7.5005 2 -3.4140 0.0010 I Q 0.80465 7.9964 1 -5.8171 0.0000 I Q -0.044948 9.5143 0 TDO -0.019371 9.2638 2 -0.99376 0.3235 TDO -0.084979 9.2631 1 -3.101 1 0.0027 TDO -0.28429 9.7552 0 IN-V 3.5444 2062.2 2 -2.6757 0.0091

Deprtnzent qf Economics, University qf'Nigericr Nsukkn 95 of 108

M Sc Dzssertatzon Globalcsed F~nancralj7ows, Capital market deepencng, and Econom~c Growth N~gerran Experience - - - -. - .- -- - . - - - - .. - INV 2.6006 2142.1 1 -5.0386 0 0000 IN V 1.0447 2450.6 0 LFD -0.35277 0.28829 2 -1.2341 0.2209

Y LFD -0.44751 0.28926 1 -4.2914 0.0001 LF D -0.83892 0.31956 0 DLFD -6.6213** 0.28782 2 0.613 1 1 0.5416 DLFD -8.7429** 0.28667 1 1.2721 0.2071 DLFD -14.51 I** 0.28779 0 DIFD -5.8501** 1.2335 2 -1.46240.1477 DIFD -1 1.227** 1.2425 1 3.2321 0.0018 DlFD -16.669** 1.3147 0 DRGDPg -5.7786** 1.8041 2 -1.6549 0.1020 DRGDPg -1 1.540** 1.824 1 1 3.5498 0.0007 DRG D Pg -16.620** 1 9534 0 DRlR -6.4785** 10.352 2 0.35538 0.7233 DRlR -8.8791** 10.294 1 1.4649 0.1470 DRlR -14.484** 10.368 0 LREXC -1.1048 0.17221 2 -1.5301 0.1301 LREXC -1.0222 0.17369 1 -5.1 177 0.0000 LREXC -0 89229 0.19946 0 DLREXC -5.6788** 0.17237 2 -1 0378 0.3026 DLREXC -9.3513"" 017246 1 1.47550.1441

b DLKEXC -16 166** 0.17374 0 LGFR -1.1932 0.44398 2 -3.7939 0.0003 LGFR -1.3444 0.48059 1 -5.8039 0.0000 LGFR -2.0695* 0.57143 0 DLGFR -4.5 169** 0.40680 2 -4.051 8 0.0001 DLGFR -1 1.968** 0.44519 1 3.8738 0.0002 DLGFR -16.925** 0.48304 0 LMcap 2.5629 0.10839 2 -1.8194 0.0727 LMcap 2.1038 0.10998 I -4.5852 0.0000 LMcap 1.0907 0.12314 0 DLMcap -6.8721 ** 0.1 1206 2 1.0898 0.2792 DLMcap -8.4625** 0.11219 1 1.1010 0.2743 DLMcap -14.032** 0.11234 0 LIQ 1.8128 0.13507 2 -3.5902 0.0006 LIQ 1.2587 0.14500 1 -6.1335 0.0000 LIQ 0.62709 0.17542 0 DLIQ -6.3791** 0.13716 2 -0.92916 0.3557 DLlQ -1 1.745** 0.13704 1 3.3322 0.0013

A DLlQ -1 7.556** 0.14554 0 L,TDO 0.59932 0.21202 2 -1.3046 0.1959 LTDO 0.53379 0.21298 1 -4.0052 0.0001 LT DO 0.42215 0.23237 0 DLTDO -7.1955** 0.20893 2 1.6330 0.1066 DLTDO ' -8.2222** 0.21 115 1 1.2821 0.2036 DLTDO -12.448** 0.21201 0 LINV 3.8610 0.18532 2 -2.5151 0.0140 IJNV 3 0883 0.19154 1 -4.7968 0.0000 LINV 1.8333 0.21658 0 DLlNV -7.2046** 0.19958 2 1.4980 0.1382 DLINV -8.4819** 0.201 16 1 1.1678 0.2464 DLINV -1 3.793** 0.20162 0

EQ( 1) Modelling FD by OLS

The present sample is: 1986 ( I ) to 2006 (4)

1)epartnzent of' Economics, University of Nigeria Nsukkn 96 of 108

MSc Dissertation; Glohalised Financialjlows, Cc~pital nzarlcct deepening, and Econotnic Growth: Nigerian Experience ... .. - - ~

Variable Coefficient Std.Error t-value t-prob PartRy

IFD -0.0094472 0.01 123 1 -0.841 0.4029 0.0093

RGDPg 0.012356 0.0069753 1.771 0.0806 0.0402

RIR 0.0014243 0.00097765 1.457 0.1493 0.0275

REXC -0.000898 10 0.00028966 -3.101 0.0027 0.11 36

GFR -0.01 5971 0.0088648 -1.802 0.0756 0.0415

Mcap 0.1275 1 0.0055370 23.029 0.0000 0.876 1

1 Q -0.01 3641 0.0014829 -9.199 0.0000 0.5301

TDO 0.0043194 0.0012761 3.385 0.001 1 0.1325

INV -4.3359e-006 4.1749e-006 -1.039 0.3023 0.0142

Ry = 0.990681 2 = 0.125254 DW - 1.59

* Ry does NOT allow for the mean *

RSS = 1.176633672 for 9 variables and 84 observations

Residual added to database

Residual = Residual values of equation 1

Unit root tests 1986 (4) to 2006 (4)

Critical values: 5%:- 1.944 1 %--2.592

t-adf i lag t-lag t-prob

Residual -2.9333** 0.1 1 1 1 1 2 -2.4594 0.0161

Residual -4.3203** 0.11461 1 -2.3551 0.0210

Residual -7.3854** 0.1 1782 0

Solved Static Long Run equation

FD = -0.009447 IFD +0.0 I236 RGDPg +0.001424 RIR

(SE) ( 0.01 123) ( 0.006975) (0.0009776)

-0.0008981 REXC -0.0 1597 GFR +O. 1275 Mcap

(0.0002897) ( 0.008865) ( 0.005537)

-0.01 364 IQ +O.OO43 19 TDO -4.336e-006 INV

( 0.001483) ( 0.001 276) (4.175e-006)

ECM added to database

Analysis of lag structure

L a g O 1 2 3 4 5 a

FD -1 0 0 0 0 0 - I

Std.Err 0 0 0 0 0 0 0

IFD -0.00945 0 0 0 0 0-0.00945

Std.Err 0.0112 0 0 0 0 0 0.01 12

RGDPg 0.0124 0 0 0 0 0 0 . 0 1 2 4

Std.Err 0.00698 0 0 0 0 0 0.00698

RI R 0.00142 0 0 0 0 00.00142

~ t d . ~ ? r 0.000978 0 0 0 0 0 0.000978

Deprrrtment @'Ecnnonrics, University of Nigeria Nsukkrr 97 of 108

hLSc Dissertation: Globalised Financialflows, Capital, rnarlcet deepening, and Economic Growth: Nigerian Experience -. ~ ~ . - . . . . .~

REXC -0.000898 0 0 0 0 0-0.000898

Std.Err 0.00029 0 0 0 0 0 0.00029

GFR -0.016 0 0 0 0 0 - 0 . 0 1 6

Std.Err 0.00886 0 0 0 0 0 0.00886

Mcap 0.128 0 0 0 0 0 0 . 1 2 8

Std.Err 0.00554 0 0 0 0 0 0.00554

I Q -0.0136 0 0 0 0 0-0 .0136

Std.Err0.00148 0 0 0 0 00 .00148

TDO 0.00432 0 0 0 0 00 .00432

Std.Err0.00128 0 0 0 0 00 .00128

INV -4.34e-006 0 0 0 0 0-4.34e-006

Std.Err4.17e-006 0 0 0 0 04.17e-006

Tests on the significance of each variable

variable F(num,denom) Value Probability lJnit Root t-test

IFD F( 1, 75) = 0.70758 [0.4029] -0.841 18

RGDPg F( 1, 75) :: 3.138 [0.0806] 1.7714

RIR F( 1, 75) - 2.1225 [0.1493] 1.4569

REXC F( 1, 75) == 9.6131 [0.0027] * * -3.1005

GFR F( 1, 75) - 3.2459 [0.0756] -1.8016

Mcap F( 1, 75) - 530.36 [0.0000] * * 23.029

IQ F( 1 , 75) = 84.61 9 [0.0000] ** -9.1 989

TDO F ( 1 , 7 5 ) = 11.456[0.0011]** 3.3847

INV F( 1, 75) = 1 .O786 [0.3023] -1 .O386

EQ(19) Modelling DLFD by OLS

The present sample is: 1987 ( I ) to 2006 (4)

J Variable Coefficient Std.Error t-value t-prob PartRy

Constant 0.022629 0.030337 0.746 0.4588 0.0097

DlFD 0.084967 0.027303 3.1 12 0.0029 0.1452

DRGDgg 0.077749 0.015750 4.936 0.0000 0.2995

DRGDPg 1 0.92019 0.15854 5.804 0.0000 0.371 5

DRIR 0.00461 06 0.00244 16 1.888 0.0641 0.0589

DRIR--1 0.0035627 0.0024587 1.449 0.1 528 0.0355

DLREXC 0.53503 0.21457 2.493 0.01 56 0.0983

DLREXC-1 0.28297 0.2028 1 1.395 0. 1684 0.0330

DLGFR 0.1 0470 0.036865 2.841 0.0708 0.0561

DLMcap 0.8 1622 0.30463 2.679 0.0096 0.1 1 19

D1,Mcap -1 0.50470 0.30183 1.672 0.1000 0.0468

DLMcap-3 -0.39383 0.23433 -1.681 0.0983 0.0472

DLIQ -0.86002 0.25208 -3.412 0.0012 0.1 696

Depnrtnlent of Economics, University of Nigerk N.mkkn 98 of 108

MSc Dissertation: Globalised Financialflows, Capital market deepening, and Economic Growth: Nigerian Experience ~ -. -. ~ - --

DLQl -0.63624 0.24904 -2.555 0.0133 0.1027

DLIQ-3 0.52607 0.1 91 52 2.747 0.0080 0.1 169

DLTDO-3 -0.089983 0. I6 I98 -0.556 0.5807 0.0054

DLINV,-2 -0.2 1948 0.14467 -1.5 17 0.1348 0.0388

DLINV-3 -0.3 I863 0.16550 -1.925 0.0592 0.061 1

ECM-I -0.54647 0.097416 -5.610 0.0000 0.3557

Ry = 0.680065 F(22, 57) = 5.5073 [0.0000] 2 = 0.2 13408 DW = 2.20

RSS = 2.595940059 for 19 variables and 80 observations

Autoregressive-distributed lag model of DLFD on DIFD

Autoregression part has lags 1 to 8

Distributed Lag part has lags 1 to 8

'The present sample is: 1988 (2) to 2006 (4)

Autoregression

Lag 1 Lag 2 Lag 3 Lag 4 Lag 5 Lag 6

Coeff. -0.6552 -0.3005 0.02434 0.3812 0.3305 0.1766

Std.Err 0.1306 0.156 0.1 581 0.1442 0.1298 0.1359

Lag 7 Lag 8

Coeff. 0.02277 0.0 1255

Std.Err 0.1 349 0.1 136

Distributed Lag

Constant Lag I Lag 2 Lag 3 Lag 4 Lag 5

Coeff. 0.041 81 -0.01 125 -0.004679 0.007853 0.04725 0.03759

Std.Err 0.03274 0.0249 0.02951 0.02993 0.02988 0.03044

Lag 6 Lag 7 Lag 8

Coeff. 0.01 51 -0.01922 0.021 73

Std.Err 0.03083 0.03087 0.02674

RSS = 3.91 4497743 6 = 0.259791 Ry - - 0.423946 b

F(16, 58) = 2.66781 [0.0033] ** Granger-Causality test for adding DIFD to DLFD:

F(8, 58) = 2.6678 [0.0033]*

Autoregressive-distributed lag model of DlFD on DLFD

Autoregression part has lags I to 8

Distributed Lag part has lags 1 to 8

The present sample is: 1988 (2) to 2006 (4)

Autoregression 1

g 3 Lag 4 Lag 5 Lag 6 .. .- . .. " . .. . .. ~

ersity of Nigcrin Nsukkn 99 of 108

M.Sc Dissertation: Globalised Financialflows, ~ Capital market deepening, and Economic Growth: Nigerian Experience - - - .--. . .. - -- - .- .- -.

Coeff. -0.6058 -0.2214 0.1456 0.01895 0.1757 0.1133

Std.Err 0.1244 0.1475 0.1496 0.1493 0.1521 0.1541

Lag 7 Lag 8

Coeff. 0.01391 -0.2032

Std.Err 0.1 543 0. I336

Distributed Lag

Constant Lag I Lag 2 Lag 3 Lag 4 Lag 5

Coeff. 0.07274 -0.527 -0.53 19 -0.3066 -0.701 7 0.222 1

Std.Err 0.1636 0.6527 0.7799 0.7901 0.7209 0.6488

Lag 6 Lag 7 Lag 8

Coeff. 0.28 15 0.2444 0.6582

Std.Err 0.6793 0.6744 0.5678

RSS == 97,79458747 P = 1.2985 Ry - 0.435692 F(16, 58) - 2.7988 [0.0022] **

Granger-Causality test for adding DLFD to DIFD:

F(8, 58) == 0.40134 [0.9153]

Autoregressive-distributed lag model of DLFD on DRGDPg

Autoregressio~i part has lags 1 to 8

Distributed Lag part has lags I to 8

The present sample is: 1988 (2) to 2006 (4)

Autoregression

Lag 1 Lag 2 Lag 3 Lag 4 Lag 5 Lag 6

Coeff. -0.6645 -0.33 18 -0.01 678 0.3776 0.301 7 0. I865

Std.Err 0.142 0.1745 0.1776 0.1603 0.1347 0.1427

Lag 7 Lag 8

Coeff. , 0.06032 0.04 l l

Std.Err 0.1424 0.1 19

Distributed Lag

Constant Lag 1 Lag 2 Lag 3 Lag 4 Lag 5

Coeff. 0.04778 0.01203 0.01253 0.005428 0.003379 0.00192

Std.Err 0.03323 0.02097 0.02537 0.02554 0.02391 0.02195

Lag 6 Lag 7 Lag 8

Coeff. -0.00997 1 -0.01 256 -0.03444

Std.Err 0.02241 0.02204 0.01786

RSS = 3.94865378 8 - 0.260922 Ry - 0.41 892 .- -. - .- . -. -. - - -. .- - , , . . . - - .. - - . -. . . .. . . , . . . . . . . -

Depnrtment of Economics, University of Nigeria Nsukku 100 of 108

M.Sc Dissertation: Cilohalised Financial flows, Capital erience - . .- ....... - . . . . . . . . .... ....

F(16, 58) - 2.61338 [0.0039] * *

' 2 Granger-Causality test for adding DRGDPg to DLFD:

F(8, 58) = 2.6153 [0.0039]

Autoregressive-distributed lag model of DKGDPg on DLFD

Autoregression part has lags I to 8

Distributed Lag par1 has lags 1 to 8

The present sample is: 1988 (2) to 2006 (4)

Autoregression

Lag I Lag 2 Lag 3 Lag 4 Lag 5 Lag 6

Coeff. -0.61 18 -0.2642 0.1 38 0.06301 0.2538 0.1388

Std.Err 0.1384 0.1675 0.1686 0.1578 0.1449 0.1479

Lag 7 Lag 8

b Coeff. -0.02 192 -0.08694

Std.Err 0.1455 0.1 179

Distributed Lag

Constant Lag I Lag 2 Lag 3 Lag 4 Lag 5

Coeff. -0.03838 0.4914 0.667 0.038 1.141 -0.477

Std.Err 0.2194 0.9377 1.152 1.172 1.058 0.8893

Lag 6 Lag 7 Lag 8

Coeff. -0.3925 0.1 15 -0.7407

Std.Err 0.9422 0.94 0.7855

RSS = 172.1 134249 i = 1.72264 Ry = 0.46275

Granger-Causality test for adding DLFD to DRGDPg:

C

MODEL 4

---- PcGive 8.00, copy for rneuller ----

---- session started at 6:23:04 on 5th January 2008 ----

Unit root tests 1987 ( I ) to 2006 (4)

Critical values: 5%--1.944 1%=z-2.592

t-adf i lag t-lag t-prob RGDPg -0.32135 1.8346 2 -3.4332 0.0010 RGDPg -0.82379 1.9574 1 -5.5107 0.0000 RGDPg -1.9139 2.2925 0 FD 2.9493 0.19362 2 -2.3667 0.0205 FD.. 2.1406 0.19924 1 -4.8991 0.0000

1)epnrtmeni of Economics, Universiiy of Nigcrin Nsukkn

M.Sc Dissertation: Globalised Financial flows, Cauital nzurlcef deeuening, and Economic Growth: Nigerian Exuerience

F D IFD IFD

'1 IFD FPI FPI FPl RlR RlR Rl R REXC REXC REXC GFR GFR GFR Mcap Mcap Mcap IQ 1Q 1Q

-mmilf' TDO TDO TDO IN V IN V IN V DRGDPg DRGDPg DRGDPg LFD LFD LFD DLFD DLFD DLFD DlFD DlFD DlFD DFPl DFPl DFPl DRlR DRlR DRIR LRRXC LREXC LKEXC DLREXC DLREXC DLREXC LGFR LGFR LGFR DLGFR DLGFR DLGFR 1,Mcap LMcap

Department of Econonlics, University of Nigeria Nsukkn 102 of 108

MSc Dissertution: Globulised FinnnciulJows, Capital nzurliet deepening, and Economic Growth: Nigerian Experience - -- - - . .. -.-." . .- LMcap 1.0907 0.12314 0 D L M ~ ~ ~ DLMcap DLMcap LIQ LIQ LIQ DLIQ DLIQ DLlQ LTDO LTDO LTDO DLTDO DLTIIO DLTDO LlNV LlNV LlNV DLINV DLINV DLINV

EQ( I) Modelling RGDPg by 0L.S The present sample is: 1986 ( I ) to 2006 (4)

Variable Coefficient Std.Error t-value t-prob PartRy F D 6.4787 2.3618 2.743 0.0076 0.0923 I FD -0.88106 0. 18866 -4.670 0.0000 0.2276 FP I 0.01 1036 0.0052496 2.102 0.0389 0.0564 RIR -0.0045 183 0.01 6373 -0.276 0.7833 0.00 10 REXC -0.0048547 0.0057162 -0.849 0.3985 0.0097 G FR 0.70878 0.12322 5.752 0.0000 0.3090 Mcap -0.77133 0.36725 -2.100 0.0391 0.0563 1 Q 0.060879 0.038016 1.601 0.1 136 0.0335 TDO 0.053445 0.022389 2.387 0.0195 0.0715 IN V 7.8832e-005 6.6252e-005 1.190 0.2379 0.01 88

Ry = 0.863965 - 1.98662 DW = 1.68

* Ry does NOT allow for the mean * RSS = 292.0537691 for 10 variables and 84 observations

Residual added to database

Residua == Residual values of equation 1

onit root tests 1986 (4) to 2006 (4)

Critical values: 5%=-1.944 1%--2.592

t-adf i lag t-lag t-prob Residual -2.3 l28* 1.5241 2 -5.2168 0.0000 Residual -4.2264** 1.7589 1 -3.21 17 0.001 9 Residual -7.8526** 1.8585 0 Solved Static Long Run equation

RGDPg = +6.479 FD -0.881 1 IFD +0.01104 FPI (:E) ( 2.362) ( 0.1887) ( 0.00525)

- . .. . ... . .... . .. . . i

Depnrtment qf' Economics, University of' Nigeria Nsukka 103 of 108

M Sc Dissertation: Glohallsed Financral flows, Capital nzarlcet deepenzng, and Economic Growth. Nigerian Experience

-0.00451 8 RIR -0.004855 REXC +0.7088 GFR ( 0.01637) ( 0.005716) ( 0.1232)

-0.7713 Mcap +0.06088 IQ +0.05345 TDO

'1 ( 0.3673) ( 0.03802) ( 0.02239) +7.883e-005 INV

-6.63E-05 WALD test ChiM10) = 469.98 [0.0000] **

Analysis of lag structure L a g 0 1 2 3 4 5 1

RGDPg - 1 0 0 0 0 0 - 1 Std.Err 0 0 0 0 0 0 0

F D 6.48 0 0 0 0 0 6.48 Std.Err 2.36 0 0 0 0 0 2.36

IFD -0.881 0 0 0 0 0 - 0 . 8 8 1 Std.Err 0.189 0 0 0 0 0 0.189

FPI 0.01 1 0 0 0 0 0 0.01 1 Std.Err 0.00525 0 0 0 0 0 0.00525

RIR -0.00452 0 0 0 0 0 -0.00452 Std.Err 0.0164 0 0 0 0 0 0.0164

REXC -0.00485 0 0 0 0 0 -0.00485 Std.Err 0.00572 0 0 0 0 0 0.00572

GFR 0.709 0 0 0 0 0 0 . 7 0 9 Std.Err 0.123 0 0 0 0 0 0.123

d Mcap -0.771 0 0 0 0 0 -0.771 Std.Err 0.367 0 0 0 0 0 0.367

IQ 0.0609 0 0 0 0 0 0 . 0 6 0 9 Std.Err 0.038 0 0 0 0 0 0.038

TDO 0.0534 0 0 0 0 0 0 . 0 5 3 4 Std.Err 0.0224 0 0 0 0 0 0.0224

INV 7.88e-005 0 0 0 0 07.88e-005 Std.Err6.63e-005 0 0 0 0 06.63e-005

Tests on the significance of each variable variable F(num,denom) Value Probability Unit Root t-test

FD F( 1, 74) = 7.5248 [0.0076] ** 2.743 1 IFD F( 1, 74) = 2 1.8 1 [0.0000] ** -4.6702 FPI F( 1,74) = 4.4196 [0.0389] * 2.1023 RIR F( 1, 74) = 0.0761 59 [0.7833] -0.27597 FEXC F( 1, 74) = 0.72 13 1 [0.3985] -0.8493 GFR F( I, 74) = 33.088 [0.0000] ** 5.7522 Mcap F( 1, 74) - 4.41 12 [0.0391] * -2.1003

k IQ F( I, 74) = 2.5644 [0.1 1361 1.6014 TDO F( I, 74) = 5.6983 [0.0195] * 2.3871 INV F( 1,74) = I ,4158 [0.2379] 1.1899

Solved Static Long Run equation DRQDPg = +3.444 +0.005867 FPI -0.002402 RIR

(SE) ( 1.234) ( 0.002539) ( 0.008685) -0.00258 1 REXC +0.3768 GFR -0.41 Mcap ( 0.00306) ( 0.06423) ( 0.1909)

+0.03236 IQ +0.02841 TDO t4.191e-005 1NV ( 0.02005) ( 0.01 179) (3.555e-005)

ECM added to database WALD test ChiM8) - 142.34 [0.0000] **

Analysis of lag structure L a g 0 1 2 3 4 5 1

DRGDPg - 1 - 0 . 8 8 1 0 0 0 0 -1.88 Std.Err 0 0 . 1 8 9 0 0 0 0 0 . 1 8 9

Constant 6.48 0 0 0 0 0 6.48 .Std.Err 2.36 0 0 0 0 0 2.36

Drpnrtmrnt of Econonzics. Universi[y of Nigeria Nsukka 104 of 108

M Sc D~ssertatlon Globalrsed Frnancrul flows (hprtal nzarltet deepenrng, and Econonrlc Growth Nlger~an Experrerice - - -- - - - - - - - - --- - - - - -- - - - - - - - - - - --

FPI 0011 0 0 0 0 0 0011 Std.Err 0.00525 0 0 0 0 0 0.00525

RIR -0.00452 0 0 0 0 0-0.00452 Std.Err 0.0164 0 0 0 0 0 0.0164

REXC -0.00485 0 0 0 0 0 -0.00485 Std.Err 0.00572 0 0 0 0 0 0.00572

GFR 0.709 0 0 0 0 0 0.709 Std.Err 0.123 0 0 0 0 0 0.123

Mcap -0.771 0 0 0 0 0 - 0 . 7 7 1 Std.Err 0.367 0 0 0 0 0 0.367

IQ 0.0609 0 0 0 0 0 0 . 0 6 0 9 Std.Err 0.038 0 0 0 0 0 0.038

TDO 0.0534 0 0 0 0 0 0 . 0 5 3 4 Std.Err 0.0224 0 0 0 0 0 0.0224

INV 7.88e-005 0 0 0 0 07.88e-005 Std.Err6.63e-005 0 0 0 0 06.63e-005

Tests on the significance of each variable variable F(num,denom) Value Probability Unit Root t-test

DRGDPg F( 1, 74) 21.81 [0.0000] * * -9.9708** Constant F( 1, 74) = 7.5248 [0.0076] * * 2.743 1 FPI F( 1, 74) - 4.4196 [0.0389] * 2.1023 RIR F( 1, 74) 0.0761 59 [0.7833] -0.27597 REXC F( 1 , 74) - 0.7213 1 [0.3985] -0.8493 GFR F( 1,74) = 33.088 [0.0000] * * 5.7522 Mcap F( 1, 74) - 4.41 12 [0.0391] * -2.1003 1Q F( 1, 74) - 2.5644 [O. 1 1361 1.6014 TDO F( 1, 74) - 5.6983 [0.0195] * 2.3871 INV F( 1 , 74) =- 1.4158 [0.2379] 1.1899

Tests on the significance of each lag Lag F(num,denom) Value Probability

1 F( 1,74) = 2 1.81 [0.0000] * * Tests on the significance of all lags up to 1 Lag F(num,denom) Value Probability

1 -1 F ( 1 , 7 4 ) = 21.81[0.0000]**

EQ(24) Modelling DRGDPg by OLS

The present sample is: 1987 ( I ) to 2006 (4)

Variable Coefficient Std.Error t-value t-prob PartRy

Constant -1.0622 0.40420 -2.628 0.0 1 10 0.1081

DLFIf 2.9180 0.85536 3.411 0.0012 0.1696

DLFD-1 1.7156 0.87824 1.953 0.0557 0.0627

' D I F D ~ 0.12928 0.96426 2.0127 0.3683 0.0142

DFP I 0.00713 14 0.00327 2.180 0.1007 0.0466

DFPI-I 0.0039279 0.004 I266 0.952 0.3452 0.01 56

DRlR -0.0388 18 0.020839 -1.863 0.0677 0.0574

DRIR-3 -0.01 21 69 0.022643 -0.537 0.593 1 0.0050

DLREXC-1 -0.79930 1.5 155 -0.527 0.6000 0.0049

DLREXC-3 3.9984 1.4443 2.768 0.0076 0.1 185

= DLGFR 1.0861 0.44786 2.425 0.01 85 0.0935 ..

Uepnrtnient of Economics, University of Nigerin Nsukkn

M.Sc Dissertation: Globalised Financid flows, Capital market deepening, and Econonzic Growth: Nigerian Experience ................. .................. ....................

D1,GFR-3

DLMcap-2

DLMcap-3

DLlQ

DLIQ.. 1

DLTDO

DLTDO -3

DLINV

DLINV-1

ECM- I

Icy = 0.547026 F(22, 57) - 3.1 289 [0.0003] A = 1.85767 DW =: 2.00

KSS = 196.704246 for 23 variables and 80 observations

. . - -. .- .-....-.............-........ .................

1)epartment of Economics, University of Nigerici Nsukka 106 of 108

M Sc Drssertatron Globalrsed FrnancralJlows, C'aprtal nzarlcet deepenrng, and Econnnzrc Growth Ngerran Experzence - - - - - - - - - . - -- -.- - -

APPENDIX B Residual correlogram

80*(Sum of 3 squared autocorrelations) - 4.285

- 1 0 1

1%

Autoregression for Residual: 3 lags from 1 to 3

The present sample is: 1987 (4) to 2006 (4)

Constant Lag 1 Lag 2 Lag 3

Coeff. 0.002 144 -0.02965 0.08777 0.2244

Std.Err 0.02039 0.1 155 0.1 159 0.1 157

RSS - 2.32641 8308 i - 0.1785 18 Rf : 0.055 1854

F(3, 73) 1.42128 [0.2435]

Testing for Error Autocorrelation from lags 1 to 3

Chif(3) = 4.999 [O. 171 91 and F-Form(3, 54) - 1.1997 [O.3 1871

Error Autocorrelation Coefficients:

1,ag 1 I , a g 2 I , a g 3

Coeff. 0.101 1 0.1303 0.2494

Normality test for Residual

The present sample is: 1987 (1) to 2006 (4)

Samplesize 80

Meah -0.000000

Std.Devn. 0.176952

.Skewness 0.01 1542

Excess Kurtosis -0.304750

Minimum -0.43646 1

Maximum 0.42086 1

Normality Chif(2). 0.01 0574 [0.9947]

Testing for Heteroscedastic errors

Chiy(44) = 48.984 [0.2799] and F-Form(44, 12) - 0.43073 [0.9789]

Department of Economics, University of Nigeria Nsukkn 107 of 108

MSc Dissertation: Globalised Financial flows, Capital market deepening, and Economic Growth: Nigerian Experience --p.p-p----...--..---------.-

VO 1 =DIFD V02=DIFD -- 1 V03=DIFD-3 V04-DKGDPg

VO5-DRGDPg - 1 V06=DKGDPg..3 V07-DLREXC VO8=DLREXC.__l

V09=DLGFR V 10-DLGFK 1 V 1 1 ==DLMcap V 12-DLMcap - 1

V 13-DLMcap 3 V 14::DLIQ V 15-DLIQ.. 1 V 16==DLIQ. 3

V 17=DLTDO . .. 3 V 1 8-DLINV-2 V 19:-DLINV - 3 V20=DRIR

V2 1 =DRIR 1 V22-ECM -1

Heteroscedasticity Coefficients:

Constant V01 V02 V03 V04 V05

Coeff. 0.01 148 -0.001735 0.003 186 0.00178 0.001027 0.002543

t-valuc 0.5766 -0.175 1 0.3374 0.2574 0.1736 0.3872

1 V06 V07 V08 V09 V10 V11

Coeff. -0.004667 -0.03781 0.01824 0.004643 0.002072 0.0374

1 t-value -0.8138 -0.4726 0.2121 0.1648 0.07281 0.3158

Coeff. 0.02672 -0.05329 -0.1939 -0.04563 -0.01438 0.05769

t-value 0.1902 -0.6546 -1.5 19 -0.3553 -0.2106 0.9607

V18 V19 V20 V21 V22 VO1f

Coeff. 0.08558 0.06623 -0.000121 2 -0.000498 -0.05091 -0.001 165

t-value 0.7844 0.5237 -0.09944 -0.3402 -0.9076 -0.6271

V029 V03f V049 V05y V06y V07y

Coeff. -0.0003955 -0.0003 142 -0.0003088-5.477e-005 0.000221 4 0.03349

t-value -0.1 895 -0.2494 -0.357 -0.06576 0.41 5 0.346

VO8y V09y VlOy V l l y V12y V13y

Coeff. -0.04557 -0.01299 0.0126 0.4573 -0.03894 0.2299

t-value -0.3642 -0.3847 0.3509 0.8766 -0.0691 3 0.5569

V14y V15y V16y V17y V18y V19y 0

Coeff. -0.21 96 0.1953 0.03766 -0.05562 -0.06735 -0.1014

t-value -0.8941 0.685 0.1541 -0.267 -0.2956 -0.4116

v20y v21y v22y

Coeff. 5.1e-005-4.225e-005 0.401 1

t-value 0.9739 -0.6655 2.053

k

1 :'

KSS = 0.05 155 1 1 5 - 0.0655433 t

M.Sc Dissertation: Globalised FinancialJows, Capital rnarlcet deepening, and Economic Growth: Nigerian Experience --- - -- -- -- VO 1 =DIFD V02=DIFD - 1 V03=DIFD-3 VO4=DRGDPg

V09=DLGFR V 10-DLGFR 1 V 1 1 =DLMcap V 12=DLMcap- 1

V13-DLMcap 3 V14---DLIQ Vl5-DLIQ 1 V16=DLIQ 3

V 17=DLTDO 3 V 18--DLINV.-2 V 19. DLINV 3 V20=DRIR

V2 1 =DRIR -- 1 V22-ECM _ 1

Heteroscedasticity Coefficients:

Constant V0 1 V02 V03 V04 V05

Coeff. 0.01 148 -0.001 735 0.003 186 0.00178 0.001027 0.002543

t-value 0.5766 -0.1751 0.3374 0.2574 0.1736 0.3872

V06 V07 VO8 V09 V10 V11

Coeff. -0.004667 -0.0378 1 0.01 824 0.004643 0.002072 0.0374

t-value -0.81 38 -0.4726 0.2121 0.1648 0.07281 0.3 158

V12 V13 V14 V15 V16 V17

Coeff. 0.02672 -0.05329 -0.1939 -0.04563 -0.01438 0.05769

t-value 0.1902 -0.6546 -1 S l 9 -0.3553 -0.2106 0.9607

V18 V19 V20 V21 V22 VO1y

Coeff. 0.08558 0.06623 -0.0001212 -0.000498 -0.05091 -0.001 165

t-value 0.7844 0.5237 -0.09944 -0.3402 -0.9076 -0.6271

V02y V03y V04y V05y V06y V07y

Coeff. -0.0003955 -0.0003 142 -0.0003088-5.477e-005 0.00022 14 0.03349

t-value -0.1895 -0.2494 -0.357 -0.06576 0.41 5 0.346

VOSy V09y VlOy V l l y V12y V13y

Coeff. -0.04557 -0.01299 0.0126 0.4573 -0.03894 0.2299

t-value -0.3642 -0.3847 0.3509 0.8766 -0.06913 0.5569

V14y V15y V169 V17y V18y V19y

Coeff. -0.2196 0.1 953 0.03766 -0.05562 -0.06735 -0.1014

t-value -0.8941 0.685 0.1541 -0.267 -0.2956 -0.41 16

v20y v21y v22y

Coeff. 5.1e-005-4.225e-005 0.401 1

t-value 0.9739 -0.6655 2.053

RSS = 0.051551 1 ii == 0.0655433

Department of Economics, Universi[v of Nigeria Nsukka 108 of 108