The Nigerian Stock Market and Oil Price: A Cointegration Analysis

Abstract

It has been theorized that oil price shocks impact negatively on stock prices. This paper subjects this proposition to test in the Nigerian case, a major world oil exporting country. Specifically, this study investigates the relationship between the Nigerian stock market
return and the world crude oil price . This has been analysed under the cointegration and vector error correction (VECM) framework from 1984 to 2007. The study shows that the Nigerian stock market return and oil price are tied together in the long –run as anticipated given the dominance of the oil sector on the Nigerian economy. However, contrary to expectation Nigeria, an oil exporting country still experiences the golden rule- “oil up, stock down” which should be applicable to oil importing countries. This may be an indication the country’s failure to translate its huge foreign exchange earnings from oil into an improved industrial sector productivity. It also an indirect manifestation of the deleterious effect of huge annual foreign exchange expenditure on importation of petroleum products for energy supply bothering on the inability to locally refine a substantial part of its crude oil and the apparent collapse of power supply by the Power Holding Company of Nigeria (PHCN) for domestic and industrial use. It is recommended that the most viable solution towards improved economic performance lies in refining the Nigerian crude oil locally so that the huge benefits of the
naturally endowed oil can be realized rather for the development of the economies of other nations.