1.1 BACKGROUND OF THE STUDY
The capital market is an establishment or foundation which contributeshugely to the socio-economic growth and development of newly created and more advanced economies. This has been attainable because ofuseful roles played by the capital market in putting into circulation funds from excess units to lesser or deficits units for the purpose of investment into projects with good, useful and completely certain net present value (NPV) which can foster economic growth of the nation. Capital market is seen as a coachman and kernel of any economy to growth and development for the fact that it is substantial for long-term growth capital formation. It is extremely important in the marshaling of savings and carrying and moving of such funds, that is, savings to produce good and effective self-liquidating investment. Capital market has been a topic of discussion among scholars, etc. it is known to make available, access to a variety of financial instruments that aid economic agents to pool, price, and also reciprocate risk. Hence, these assets with attractive rewards, liquidity and risk qualities encourage savings in financial form. This is crucial for government and other establishments in need of long-term funds and for suppliers of long-term funds. The energetic, very important roles played by the capital market in the achievement of economic growth aids the government, industries and corporate bodies to heighten long-term capital for the goal of financially supporting new projects, spreading and modernizing industrial concerns. Benefits of the capital market to corporate establishments that exists by their selves are the provision of long-term, non-debt financial capital. On the basis of its huge importance in acting as a catalyst that speeds us the economic growth and development, government of most nations like Nigeria works towards having strong positive interest in the performance of its capital market. Long lasting confidence in the market and for a strong investors’ protection arrangement has being a thing of great concern in the country. The Central Bank of Nigeria is fully empowered to execute duties that foster the financial and monetary system and also aid soundness. In order to attain the monetary stability, it is always challenged with the problem of having a preference of the right strategy to apply for the goal of meeting the desired end. In the company of the well-known and accepted strategies are, capital market targeting, exchange rate targeting, monetary targeting, nominal GDP targeting and inflation targeting. Inflation targeting is known as the process of offering a framework of constrained discretion in which the constraint is the inflation target and the discretion is the scope and flexibility of taking account of economic and other considerations (Kuttner& Posen 2000). It is also seento be that type which completely ignores, neglects the real effect of monetary policy both in the short andmedium term and concentrates only on controlling inflation within the shortest possible time limit. Therefore, fast output growth and low inflation is the most common elementary of macro-economic policy. Some scholars agrees that inflation may also reduce a country’s international competitiveness, by making its exports rather more expensive, in this manner, impaction negatively on the balance of payment, capital market performance, furthermore reducing capital assemblage and productivity growth.
Exchange rate is a major factor that identifies inflationary rate in Nigeria. Foreign exchange is the precise foreign currency or various claims on it that are traded for each other. The changes in exchange rate can positively or negatively influence the relative prices. A meaningful appreciation of the domestic currency makes domestic goods relatively expensive to foreign goods leading to a shift of demand away from domestic to foreign goods. The impact of such a shift on the economy is often a reduction of demand pull inflation.A predictable increase in the rate of inflation can slow down financial market development.It is for this reason that the study is seeks to examine inflation and capital market performance in Nigeria.
1.2. STATEMENT OF THE GENERAL PROBLEM
Inflation has been a reoccurring problem in the West African sub region and Nigeria in particular. Constant rise in the prices of commodities and services in Nigeria overtime has negatively affected the economic and general development. Inflation has a bandwagon effect on virtually all sectors of the economy and the capital market is definitely not excluded as been hit hard by inflation. The poor performance of the Nigerian capital market has resulted to lack of investment in Nigeria which has ultimately resulted in the poor socio economic development of Nigeria as the capital market is one of the determinants of growth and development.
1.3. AIMS AND OBJECTIVES OF THE STUDY
The major aim of the study is to examine the effect of inflation on capital market performance in Nigeria. Other specific objectives of the study include;
To investigate the major cause of inflation in Nigeria
To examine the negative consequences of inflation in Nigeria
To examine the relationship between inflation and economic growth and development.
To highlight the influence of capital market performance on the economy of Nigeria.
To recommend ways of reducing the rate of inflation in Nigeria.
1.4. RESEARCH QUESTIONS
What is the effect of inflation on capital market performance in Nigeria?
What are the major causes of inflation in Nigeria?
What are the negative consequences of inflation in Nigeria?
What is the relationship between inflation and economic growth and development?
What is the influence of capital market performance on the economy of Nigeria?
What are the ways of reducing the rate of inflation in Nigeria?
1.5. RESEARCH HYPOTHESES
H0 Inflation has no significant influence on the Nigerian capital market performance.
H1 Inflation has a significant influence on the Nigerian capital market performance.
H0: There is no significant relationship between inflation and economy of Nigeria
H1: There is a significant relationship between inflation and the economy of Nigeria
1.6. SIGNIFICANCE OF THE STUDY
The study would be of immense importance to the government at all levels, policy makers, economists and all relevant stakeholders as it seeks to unravel the effect of inflation on capital market performance and the economy of Nigeria. The study would also benefit researchers, students and scholars who are interested in further research on the subject matter.
1.7. SCOPE AND LIMITATION OF THE STUDY
The study is on the effect of inflation on capital market performance in Nigeria 1985 to 2015.
LIMITATION OF THE STUDY
Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview)
Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.
1.8. OPERATIONAL DEFINITION OF TERMS
Capital Market: This is the buying and selling of equity and debt instruments. It is a fraction of the financial system that is concerned with shares, bonds and other long term investments.
Investment: This is an asset or an item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth.
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