Stock Market Volatility Impact on Nigeria Research Paper

Pages: 12 (3734 words)  ·  Bibliography Sources: 12  ·  File: .docx  ·  Level: Master's  ·  Topic: Economics  ·  Written: April 30, 2019

SAMPLE EXCERPT . . .
As Bertholet (2018) points out, the members of ECOWAS and the other trade partners that are looking to Nigeria may not be forgiving if Nigeria fails—everything hangs in the balance with respect to West African integration, too: “Without a regional EPA, the iEPAs of Côte d’Ivoire and Ghana will become permanent and torpedo the slow process of regional integration at work since the creation of ECOWAS in 1975, while the primary objective of the EPAs and the Cotonou Agreement of 2000 between the EU and the ACP (Africa-Caribbean-Pacific) countries is to promote regional integration in the Regional Economic Communities (RECs) of the ACP countries.” What will be Nigeria’s role in this if it moves towards a more independent economic position? And if it moves to a more economic independent position, what will the impact of volatility in the stock market be on its economy? This can serve as this study’s research question.

Definitions

The three main variables in this study proposal are the stock market, stock market volatility, and the Nigerian economy. In the literature review section of this proposal, both will be discussed in more detail. For now, the following definitions are provided to illustrate what is meant by these terms.

The stock market is defined as “an institution recognized for dealing in securities plays a major role in financial intermediation in both developed and developing economies (Nigeria inclusive) by chanelling idle funds from surplus units to deficit units in the economy” (Omoregie, Eromosele & Edo, 2016, p. 11).

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Stock market volatility is defined as “a measure for variation of the price of a financial asset over time. It is essentially concerned with the dispersion and not the direction of price changes. Stock market volatility is the systematic risk faced by investors who hold a market portfolio (e.g., a stock market index fund)” (Omoregie, Eromosele & Edo, 2016, p. 10).

The economy is defined as “the large set of inter-related production and consumption activities that aid in determining how scarce resources are allocated” (Kenton, 2018).

Research Paper on Stock Market Volatility Impact on Nigeria Assignment

Literature Review

As President Buhari has since made clear, he aims to keep Nigeria out of the free trade agreement that is the ECOWAS EPA because, as he asserts, it would mean the ruin of Nigerian’s development: “Our industries cannot compete with the more efficient and highly technologically driven industries in Europe. We are not enthusiastic about signing the EPA because of our largely youthful population,” Buhari stated (Giles, 2018). Just as President Trump in the U.S. is determined to enact fair trade laws that would benefit the American worker, Buhari of Nigeria is determined to embrace only fair trade laws that would benefit the Nigerian worker. Eliminating all trade barriers would potentially drive Nigerian production into the ground—and Buhari is intent on seeing Nigeria develop as an industrial state. Nonetheless, there are advantages to the agreement: this paper will examine the arguments for and against by explaining the state’s reluctance to signing the EPA and examining the advantages that could result from agreeing to it.

As one of the world’s top three growing economies as recently as 2015, Nigeria was gearing up to be a serious player in the global markets. It had an Industrial Revolution Plan and a National Enterprise Development Programme that were set to enhance the country’s industrial output and increase development in the state. Ratifying the ECOWAS proposal would have been contrary to the aims of the state’s Industrial plan and Development program (International Centre for Trade and Sustainable Development, 2014). The Nigerian President stated that the Industrial Revolution Plan specifically aimed to produce “fast-track industrialization, accelerate inclusive economic growth, job creation, transform Nigeria’s business environment and stop the drain on [the country’s] foreign reserves caused by importing what can [be] produced locally” (International Centre for Trade and Sustainable Development, 2014). In other words, Nigeria had a different vision for itself than the EU and the other ECOWAS nations had for it and for themselves.

The EU is essentially looking for a place to export more goods and it sees Nigeria growing with a considerable GDP. It sees that Nigerians have money to spend and EU countries and corporations want access to that market. Nigeria’s leaders, however, know that if they open the doors to European products, their own country will fail to achieve the goals they have set out for their state, their people, and their industries. Nigeria is in growth mode and it wants to become an exporter. It does not want to dig itself a hole by becoming an even larger importer than it already is. Dependency upon other countries for the goods its people seek is not a condition that Nigeria’s leaders want to foster. They want a proud, independent, and productive Nigeria. From this standpoint, the country’s reluctance to ratify the EPA is completely justified.

Nigeria’s ambitions conflicted with the Economic Partnership Agreement of the ECOWAS for the basic reason that “certain provisions of the agreement were not in the best interest of the nation's economy” (International Centre for Trade and Sustainable Development, 2014). The ECOWAS EPA planned to liberalize 75% of trade over a 20 year period. Because Nigeria is the largest country of the ECOWAS, it would mean that it would be losing out from such a huge amount of liberalization of trade. Olusegun Aganga stated that “Nigeria is the biggest country in the ECOWAS and [Nigerians] are already producing some of those goods that they want us to liberalise” (International Centre for Trade and Sustainable Development, 2014).

Aganga explained that the ECOWAS EPA “from 2025 to 2026, based on the items that have included and excluded, there will be significant loss of revenue to the government, loss of jobs, investment” (International Centre for Trade and Sustainable Development, 2014). According to Aganga, “given Nigeria’s current condition as an import-dependent economy, it would be counter-productive to completely open its doors for imports without first of all developing its industrial sector to compete globally” (International Centre for Trade and Sustainable Development, 2014).

Nigeria’s imports have vastly outweighed its exports to other ECOWAS countries. To become more of a major player on the global stage, Nigeria wants to rectify that situation, and liberalizing trade even more would only further hinder Nigeria’s ambitions. As Oguanobi et al. (2014) point out, “Nigeria is the largest country in West Africa accounting for about 60 Percent of the region’s Gross Domestic Product (GDP)” (p. 61). Within the ECOWAS, Nigeria aimed to achieve the following the goals: “Securing greater regional market access, promoting industrialization through exported growth and capacity building required to meet global market competition” (Oguanobi et al., 2014, p. 61). Doing so, however, will require investment from abroad, and the volatility of the stock market could impact the appeal of the Nigerian economy depending upon how one views volatility’s effects. The fact is that not all researchers or academics view it in the same light.

In today’s marketplace, economic variables are being redefined by the banks and the technology used by trading firms: risk is unknown at any one moment—and if one studies VIX or GARCH volatility, the expectation in the marketplace is that there is very little awareness of risk whatsoever. The markets are complacent to a high degree, to judge from the S&P 500 GARCH graph, or any of the various equities that dominate the global market landscape.

Measuring risk aversion is important to financial decision making because one’s aversion for risk will determine the nature of one’s investments. Riskier investments tend to produce greater returns, but they also pose the greatest risk of failure; less risky investments typically ensure minimal to modest or set returns, which may not help to grow an investor’s wealth substantially but will essentially provide little cause for concern of losing one’s investment. One’s risk aversion can help to signify whether one is taking too risky positions in a portfolio or if one can stand to branch out of safer investments to seek higher yield. This is why understanding the role that volatility plays in the Nigerian market is so important, especially in the light of what Nigerian is aiming to do to solidify its power as the dominant emerging market in Africa.

Methodology

The methodology proposed for this study project is to conduct a qualitative systematic review of literature on the effects of volatility in the stock market as well as literature on the Nigerian economy plus literature that combines these two topics to see if there is a common or consistent understanding that can be developed. Because the research is likely to show mixed results in terms of what the effects of stock market volatility on the Nigerian economy are, the study will also conduct interviews with professionals in the financial industry in Nigeria to see if they can determine or have determined any effects of volatility on the economy in Nigeria over the… [END OF PREVIEW] . . . READ MORE

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