59

Oil prices and stock market price in Nigeria

Philip Ifeakachukwu Nwosa*
*Assistant Lecturer, Department of Accounting, Economics and Finance, College of Management
Sciences, Bells University of Technology, P. M. B. 1015 Ota, Nigeria. Email: nwosaphilip@yahoo.com

Abstract
This paper examined the relationship between oil prices (international oil price and domestic oil
price) and stock market price in Nigeria for the period spanning 1985:1 to 2010:4. The study utilised
the Johansen’s multivariate cointegration test and the vector error correction model (VECM). The
Johansen’s test showed that the variables are cointegrated, and the cointegration equation revealed
that oil prices have significant relationship with stock market price in the long run. The VECM esti-
mate only revealed a unidirectional causality from stock market price to international oil price in the
long run. A unidirectional causality was also observed from domestic oil price to stock market price
in the long run. The study recommended that policymakers, financial analyst and shareholders
should into cognizance changes in international oil price and domestic oil price in their financial
decisions given the significant impact of oil prices on stock market price in Nigeria.

1. Introduction
Oil price increases are assume to affect stock market price through the future cash flows of
companies and through the interest rate use in discounting the future cash flows (Miller
and Ratti, 2009; Basher et al., 2010). Given the indispensable impact of oil in the produc-
tion process, rising oil prices are usually accompanied by rising production costs. In the
absence of complete transfer of increased production cost to the consumers, such
increased costs result in a decline in profit and consequently, a decline in shareholders’
return and stock price. Also, rising oil prices reduce consumers’ disposable income spent
on the purchases of goods and services. The combine effect of increased production cost
and a decline in consumers demand culminates in reduce profits and dividends that are key
drivers of stock prices (Basher and Sadorsky, 2006; Al-Fayoumi, 2009). Apart from the
above, rising oil prices have been observed to be inflationary and monetary authorities
often respond with contractionary policy measures (such as raising short term interest
rates) that affects the discount rate used in stock pricing formula (Basher et al., 2010).
Higher interest rates also make bonds look more attractive than stocks leading to a fall in
stock prices (Basher and Sadorsky, 2006).

JEL Classification: G12, Q49

© 2014 Organization of the Petroleum Exporting Countries. Published by John Wiley & Sons Ltd, 9600 Garsington

Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
60 Philip Ifeakachukwu Nwosa

Based on the above theoretical exposition, studies have been conducted empirically
to examine the nature of the relationship between oil price and stock market price. Most
studies in this regard exist for developed oil importing countries, and their results can
best be described as inconclusive. Studies by Arouri and Rault (2010), Oberndorfer
(2009), Park and Ratti (2008) and O’Neill et al. (2008) among others observed a signifi-
cant negative relationship between oil price and stock return, whereas studies by Le
and Chang (2011) and Masih et al. (2011) observed a positive relationship between
oil price and stock price. Also, studies by Sari and Soytas (2006), Maghyereh (2004),
Cong et al. (2008) and Huang et al. (1996) do not observe any relationship between oil
price and stock market return. The inconclusiveness on the oil price–stock market price
relationship in the literature provided strength for this study to examine this issue in an
oil exporting–developing economy like Nigeria. Apart from the above, studies by
Al-Fayoumi (2009), Bjornland (2009) and Jiménez-Rodríguez and Sánchez (2005)
argued that an oil price increase is expected to have a positive effect in an oil exporting
country, as this would lead to increase in national income. The increased income is
expected to result in increase expenditure and investment on infrastructures and other
mega projects, which in turn would create greater productivity (Filis et al., 2011). Such
investments are expected to stimulate the stock markets positively and hence stock
market price. This study therefore examined this hypothesis within the context of the
Nigerian economy.
In addition to the forgoing raised issue, it is worthy of note that domestic oil price (such
as petrol) has witnessed sudden upward price reviews at different times by different politi-
cal administration. Such domestic oil price upward reviews have generated intense
responses from the general public particularly the households and business units, because
such increase in domestic oil price acts as inflationary tax on producers and consumers by
increasing firms’ production cost and reducing consumers’ disposable income, respec-
tively. Given the high dependence of productive firms in Nigerian on domestic oil in the
production process, especially in the face of the epileptic nature of electricity supply, the
combine effect of the above would undoubtedly affect future cash flow of firms in Nigeria
through reduction in profit and may also adversely affect stock market price. Also, given
the inflationary consequence of increased domestic oil price on the general price level, the
response of the Central Bank of Nigerian (CBN) could also adversely affect stock market
price through its impact on the discount rate used in stock pricing formula. Based on the
above argument, the following research questions are raised: (i) does international crude
oil price (IOP) influence stock market price in Nigeria?; and (ii) does stock market price
respond to changes in domestic oil prices (DOP) in Nigeria?
As argued above, studies have examined the relationship between oil price and stock
market price in developed oil importing countries, while in developing countries, there is a
lack of literature in this gap in knowledge. With respect to Nigeria, studies on oil price have

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 Oil prices and stock market price in Nigeria 61

mostly centred on oil price–economic growth issue (see Ayadi, 2005; Olomola and
Adejumo, 2006; Omisakin, 2008; Akpan, 2009; Aliyu, 2009a,b; Gunu and Kilishi, 2010).
These studies failed to consider the potential effect of oil prices on stock market price.
Understanding the relationship between oil prices and stock market price is fundamental
for an appropriate assessment of the impact of past upward reviews of domestic oil price
on the performance of the stock market. Also, given the current debate in the domestic oil
sector on whether or not government should remove subsidy from domestic oil price, now
is an excellent moment to investigate this issue as the outcome of this study would enable
policymakers in making appropriate macroeconomic decisions. Apart from the above,
studies have shown that the stock market is an important means of channelling fund to the
real sector; it is therefore pertinent to know the relationship between oil prices and stock
market in order for government to take proactive measures against policies that are injuri-
ous to the stock market in particular and real sector in general. Furthermore, understand-
ing the relationship between oil price and stock market would provide relevant information
for shareholders, foreign investors, financial analysts and portfolio manager on the ability
of fluctuation in oil price in predicting stock returns. Finally, the findings of this study
would reveal if the stock market is a potential channel through which oil price shocks (both
international oil price and domestic oil price) is transmitted to the Nigerian economy. It is
against the above background that the study seeks to examine the relationship between oil
prices and stock market price in Nigeria.
In addition to the introduction, the rest of the paper is structured as follows. Section 2
presented a review of related studies, while Section 3 discussed the methodology on which
this study is based. Section 4 presented empirical analysis, while Section 5 provided the
conclusion and policy recommendation of the study.

2. Literature review
Although plethora of literature exists on the relationship between oil price and stock
market price, a few are reviewed herein. Bhunia (2012) examined the short-term and long-
term relationships between BSE 500, BSE 200 and BSE 100 index of Bombay Stock
Exchange and crude price for the period 2 April 2001–31 March 2011. The empirical
results of the study showed that there exist a cointegrated long-term relationship between
the three stock market indices and crude price. Also, the Granger causality results revealed
that there exists a unidirectional causality from all indices of the stock market to crude
price, but no feedback was observed from crude oil price to the three indices of the stock
market. Mohanty et al. (2011) examined the relationship between oil price changes and
equity returns in Gulf Cooperation Council (GCC) countries. The study observed a posi-
tive and significant relationship between oil price changes and stock prices in GCC coun-
tries except for Kuwait.

© 2014 Organization of the Petroleum Exporting Countries OPEC Energy Review March 2014
62 Philip Ifeakachukwu Nwosa

Le and Chang (2011) examined the impact of oil price fluctuations on stock markets in
developing and emerging economies for the periods January 1986 to February 2011.
Applying the generalised impulse response and variance decomposition analysis from a
vector autoregressive model, the study revealed that the reaction of stock markets to oil
price shocks varied significantly across markets. Specifically, the stock market was
observed to have responded positively in Japan while negatively in Malaysia; the signals in
Singapore and South Korea were unclear. In addition, the study suggested that stock
market inefficiency, among others, appeared to have slowed the response of the stock
markets to aggregate shocks such as oil price surges.
Basher et al. (2010) examined the dynamic relationship between oil prices,
exchange rates and emerging stock market prices using monthly data over the periods
January 1988 to December 2008. The study utilised a structural vector autoregression
model and observed that in the short run, positive shocks to oil prices tend to depress
emerging stock market prices and US dollar exchange rates. The study also revealed that
a positive oil production shock reduces oil prices, while a positive shock to real eco-
nomic activity increases oil prices. More so, the study found evidence that increases in
emerging stock market prices also increases oil prices. In South Korea, Masih et al.
(2011) examine the relationship between oil price volatility and stock price fluctuation,
using monthly data covering the period May 1988 to January 2005. Using a vector
autoregression (VAR) model, the study observed that oil price volatility significantly
influenced real stock returns. In Greece, Filis (2010) observed that oil prices have sig-
nificant negative impact on stock prices.
Jawadi et al. (2010) examined the non-linear linkages between oil and stock markets in
developed (United States and France) and emerging (Mexico and Philippines) countries
using monthly data from December 1987 to March 2008. The study showed a significant
non-linear cointegration relationship between the oil and stock markets in developed and
emerging markets. Arouri et al. (2010) examined the relationship between oil price shocks
and stock market returns in oil exporting GCC countries using weekly data covering the
period from 7 June 2005 to 21 October 2008. Using linear and non-linear models, the
study observed that stock market returns significantly react to oil price changes in Qatar,
Oman, Saudi Arabia and UAE. In addition, the study established that the relationships
between oil prices and stock markets in these countries are non-linear and switching
according to the oil price values. However, for Bahrain and Kuwait, the study revealed that
oil price changes do not affect stock market returns.
Miller and Ratti (2009) examined the long-run relationship between the world price of
crude oil and international stock markets using monthly data for the periods spanning
January 1971 to March 2008. Utilising a cointegrated vector error correction (VEC)
model with additional regressors and allowing for endogenously identified breaks in the
cointegrating and error correction matrices, the study revealed evidence of breaks after

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 Oil prices and stock market price in Nigeria 63

May 1980, January 1988 and September 1999. The study also found that stock market
indices responded negatively to increases in the oil price in the long run for the six Organi-
zation for Economic Cooperation and Development (OECD) countries for the periods
January 1971 to May 1980 and February 1988 to September 1999. For the periods June
1980 to January 1988, the study observed that the relationship between stock market
indices and oil prices were not statistically significantly different from either zero or from
the relationships of the previous periods. In addition, the study revealed that the expected
negative long-run relationship between stock market indices and oil price appeared to have
disintegrated after September 1999.
Park and Ratti (2008) observed a negative relationship between oil prices and stock
returns in the United States and in 12 European countries, while for Norway, an oil export-
ing country, the study observed that stock market responded positively to oil price rise. In
China, Cong et al. (2008) observed that oil price shocks have no significant impact on
stock returns for most Chinese stock market indices. Nandha and Hammoudeh (2007)
examined the short-run reaction of stock markets to oil price shocks in the Asia-Pacific
region. The study observed that stock markets in Philippines and South Korea were oil-
sensitive when oil price is expressed in local currency only. Also, the study observed that
none of the countries studied was sensitive to oil prices expressed in US dollars, irrespec-
tive of conditions in the oil market. Basher and Sadorsky (2006) examined the relationship
between oil price risk and emerging stock market returns for 21 emerging countries using
daily data covering the period 31 December 1992 to 31 October 2005. Utilising an inter-
national multifactor model that allowed for both unconditional and conditional risk
factors, the study observed significant evidence that oil price risk impacted stock price
returns in emerging markets.
Maghyereh (2004) examined the relationships between oil price and stock market
prices in 22 emerging markets. The study observed that oil price did not impact stock
returns in these countries. Hammoudeh and Aleisa (2004) examined the relationship
between oil prices and stock prices for five members (Bahrain, Kuwait, Oman, Saudi
Arabia and the United Arab Emirates) of the GCC. Using daily data, the study observed
that only the Saudi Arabia stock market had a bidirectional relationship between oil
prices and stock prices. Sadorsky (1999) utilised a vector autoregression model with
generalised autoregressive conditional heteroscedasticity on US monthly data. The study
observed a significant relationship between oil price changes and aggregate stock returns
in the United States. In particular, the study revealed that oil prices have asymmetric
effects, with positive oil shocks having a greater impact on stock returns and economic
activity than negative oil price shocks. Using a VAR model, Huang et al. (1996) found no
evidence of a relationship between oil prices and market returns such as the Standard &
Poor’s 500. From the above review of literature, it is evident that there exist no clear-cut
evidence on the relationship between oil price and stock market price.

© 2014 Organization of the Petroleum Exporting Countries OPEC Energy Review March 2014
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3. Research methodology
3.1. Data descriptions, measurement and source
This study used quarterly data for a time span of March 1985 to December 2010. The
analysis of the relationship between oil price and stock market price used two measures of
oil price. These are: (i) IOP measured by the world oil price and sourced from West Texas
Intermediate and (ii) DOP measured by the retail pump price of petrol (in Naria per litre)
and sourced from the Nigerian National Petroleum Corporation statistical bulletin. Eco-
nomic growth is measure by the real gross domestic product and sourced from the CBN
statistical bulletin, whereas the short-term interest rate is measured by monetary policy
rate (MPR), sourced from the International Financial Statistics of the World Bank. All data
with exception to interest rate are transformed into logarithm form.

3.2. Model specification

To examine the relationship between oil prices and stock market price, this study specified
two different models, each for IOP and DOP, and investigates the relationship between
each of these oil variables and stock market price. Explanatory variables (economic
growth and short term interest rate) were also introduced into the model. The model is
summarised as follows:

SP = f (OPt i , RGDPt , ITRt ) (1)

where:
SP = stock market price;
OP = oil price and i = different oil prices (IOP and DOP);
RGDP = economic growth (proxy by gross domestic product); and
ITR = short-term interest rate (proxy by the MPR).
Equation (1) above can be written in the form of a multivariate VAR model as:

X t = α 0 + β1 X t −1 + β 2 X t − 2 + β3 X t −3 + ……+ β q X t − k + ut (2)

where: X t = [ SP OP Y R ] .
1

Equation (2) can be written more compactly as:

k
X t = α 0 + β1 ∑ X t = j + ε t . (3)
j =1

Xt is a 4x1-dimensional vector of endogenous variables of the model, a0 is a 4x1-

dimensional vector of constant and b1 is 4x4 dimensional autoregressive coefficient

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 Oil prices and stock market price in Nigeria 65

matrices of estimable parameter and et is k-dimensional vector of the stochastic error term
normally distributed with white noise properties N(0,s2).
The estimation of equation (3) required appropriate estimation techniques to ensure
proper VAR model specification. Therefore, it is necessary to examine the properties of the
data for estimation and the existence of cointegration among the variables, prior to the
granger causality analysis. If the series are observed not to be cointegrated, then the short-
run VAR granger causality model of equation (3) would be utilised to examine the rela-
tionship between oil prices and stock price. The granger causality model is specified as:

m n
opti = ∑ α11opti−i + ∑ α12 spt −i + ε1t (4)
i =1 i =1

m n
spt = ∑ α 21opti−i + ∑ α 22 spt −i + ε 2t (5)
i =1 i =1

where: opt and spt are as defined above, e1t and e2t are the disturbances term are assumed to
be uncorrelated with white noise properties N(0,s2).
On the other hand, if the series are integrated of the same order and are cointegrated,
then the VAR model must include an error correction term (ECT) (Engle and Granger,
1987; Bekhet and Yusop, 2009). Therefore, the VAR model incorporating the ECM is
specified in a VEC model as:

k
Δ X t = α 0 + Π X t −1 + ∑ Γ j Δ X t − j + ε t (6)
j =1

Where D is the difference operator, Xt is a 4x1-dimensional vector of non-stationary I(1)

endogenous variables of the model, a0 is a 4x1-dimensional vector of constant and et is
k-dimensional vector of the stochastic error term normally distributed with white noise
properties N(0,s2). P is the long-run matrix that determines the number of cointegrating
vectors that consist of a and b’ representing speed of adjustment towards long-run equi-
librium and long-run parameter, respectively. G is the vector of parameters that represents
the short-term relationship.
The vector error correction model (VECM) model of equation (6) allows us to deter-
mine the direction of causation between observed variables while providing estimate on
both the long run and the short run. The cointegration, which is a property of long-run
equilibrium, provides information about the long-run relationship among the variables,
while the Granger causality test, which is a short-run phenomenon, provides information
on the short-run dynamics among the variables (Rahmaddi and Ichihashi, 2011). Further-
more, a common lag length of three for each VAR model is adopted for the VAR models.

© 2014 Organization of the Petroleum Exporting Countries OPEC Energy Review March 2014
66 Philip Ifeakachukwu Nwosa

The choice of this lag length has the advantage of whitening the errors for each of the indi-
vidual VAR. Also, lag lengths that are too short could result in autocorrelation of the error
terms, thereby resulting in insignificant and inefficient estimators. A larger lag length on
the other hand, increases the number of parameters, which would decrease the degrees of
freedom, implying large standard errors and therefore wide confidence intervals for model
coefficients (Füss, 2007).

4. Empirical result
4.1. Unit root test
The unit root tests on the variables were carried out using both the Augmented Dickey–
Fuller and the Philip–Perron tests, and the results are presented in Table 1. It was observed
from the table that all variables were non-stationary at 5 and 10 per cent level of signifi-
cance in their level form, thus leading to the testing of the variables at first differences,
which revealed that all the variables were stationary at first difference, that is, integrated of
order one I(1).

4.2. Cointegration estimate

Having confirmed the stationary status of the variables, the study proceeded to examine
the existence of cointegration among the variables. From the cointegration estimates, the
international oil price model (that is model I involving IOP, ITR, RGDP and SP) revealed
that the null hypotheses of no cointegration, for r = 0 and r ⱕ 1 was rejected by both the
trace statistics and the maximum eigenvalue statistics. The statistical values of these tests
were greater than their critical values. However, the null hypotheses of no cointegration,
for r ⱕ 2 could not be rejected by both the trace and the maximum eigenvalue statistics.
The statistical values of these tests at r ⱕ 2 were less than their critical values, implying
that there exist two cointegrating equations at 5 per cent. This result suggests the existence

Table 1 Unit root test result

Augmented Dickey–Fuller test Phillip–Perron test

Variables Level 1st Diff Status Level 1st Diff Status

itr -2.0127 -9.4865* I(1) -1.9370 -9.7713* I(1)
liop -1.1637 -8.4637* I(1) -0.8401 -10.7122* I(1)
ldop -1.3355 -10.9345* I(1) -1.3459 -10.9043* I(1)
lrgdp 0.9700 -3.9533* I(1) 1.2402 -14.0407* I(1)
lsp -1.9542 -8.7902* I(1) -1.7526 -8.9822* I(1)
Note: * implies 1% significance level.

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 Oil prices and stock market price in Nigeria 67

of a long-run relationship among the variables in model I. With respect to domestic oil
price model (that is model II involving DOP, ITR, RGDP and SP), it was observed that the
null hypothesis of no cointegration, for r = 0 was rejected by both the trace statistics and
the maximum eigenvalue statistics. The statistical values of these tests were greater than
their critical values. However, the null hypotheses of no cointegration, for r ⱕ 1 could not
be rejected by both the trace and the maximum eigenvalue statistics, because the statistical
values of these tests at r ⱕ 1 were less than their critical values, implying that there exists
one cointegrating equation at 5 per cent. This result also suggests the existence of a long-
run relationship among domestic oil price, stock price and other macroeconomic variables
in model II (Table 2).
Based on the cointegration estimate, the dynamic relationship between the various
measures of oil price and stock price were estimated using VECM model of equation (7).
The resulting long-run relationship (cointegrating equations) between the various meas-
ures of oil price and stock price are presented below.

4.3 Effect of international crude price on stock price

Long-run cointegration on stock price and international oil price equation (model 1)
The long-run cointegration international oil price equation below revealed that interna-
tional oil price (liop), interest rate (itr) and real gross domestic product (lrgdp) were sig-
nificant determinant of stock market price in Nigeria. This result implied that there are
9.23 per cent and 0.20 per cent positive change in stock market price due to 1 per cent
change in international oil price and short-term interest rate, respectively, in the long run.
On the other hand, if there is a 1 per cent increase in real gross domestic product, it would
reduce stock market price by 16.52 per cent in the long run. Therefore, base on the cointe-
gration test and result of the cointegration equation, it was concluded that there exist a
positive relationship between international oil price and stock market price in the long run.
This result is similar to that observed by Mohanty et al. (2011) on the relationship between
oil price and stock market price.
Model I: Long Run Cointegration International Oil Price Equation:

LSPt = 146.418 + 9.219 LIOPt −1 + 0.195 ITRt −1 − 16.516 LRGDPt −1 + ε t

t: [6.357] * [ 2.064 ] ** [ −8.386 ] *
SE : (1.450 ) (0.094 ) (1.969)

Note: * and ** imply 1% and 5% significance level, respectively.

VECM causality estimate on international oil price and stock price

The VECM estimate involving the long-run and short-run nexus between IOP and stock
price is presented in Table 3 below. It was observed that the ECT for cointegration

© 2014 Organization of the Petroleum Exporting Countries OPEC Energy Review March 2014
 68

Table 2 Summary of the cointegration estimate

OPEC Energy Review March 2014

Trace Test Maximum Eigen value Test

95% critical 95% critical

Null alternative Statistics values Null alternative Statistics values
Model I r=0 rⱖ1 66.128 47.856 r=0 r=1 33.263 27.584
rⱕ1 rⱖ2 32.865 29.797 rⱕ1 r=2 22.721 21.132
rⱕ2 rⱖ3 10.144 15.495 rⱕ2 r=3 9.794 14.265
rⱕ3 rⱖ4 0.350 3.841 rⱕ3 r=4 0.350 3.841
Model II r=0 rⱖ1 57.908 47.856 r=0 r=1 35.107 27.584
Philip Ifeakachukwu Nwosa

rⱕ1 rⱖ2 22.801 29.797 rⱕ1 r=2 12.333 21.132

rⱕ2 rⱖ3 10.468 15.495 rⱕ2 r=3 10.451 14.265
rⱕ3 rⱖ4 0.017 3.841 rⱕ3 r=4 0.017 3.841
Note: Author’s computation using e-views 7.

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 Oil prices and stock market price in Nigeria 69

Table 3 VECM causality estimate

Dependent variables

1 2 3 4
Independent
variables DLSP DLIOP DITR DLRGDP
DLSP — 0.2484 [1.813] -0.821 [-0.523] -0.028 [-0.761]
DLIOP 0.135 [1.667] — 0.546 [0.462] 0.037 [1.338]
DITR -0.002 [-0.212] -0.001 [-0.086] — -0.001 [-0.231]
DLRGDP -0.480 [-1.751] -0.189 [-3.378]* -1.323 [-0.328] —
ECT -0.006 [-0.679] -0.060 [-5.700]* -0.093 [-0.780] 0.001 [0.195]
Source: Author’s computation.
Notes: Numbers above parentheses are coefficient values while numbers in the parentheses are
t-statistics values. * Denotes significance at 1%.

equation with stock price as dependent variable was insignificant, implying no causation
from international oil price to stock market price in the long run. Similarly, no evidence of
causality was observed between international oil price and stock price in the short run.
However, the ECT for cointegrating equation with international oil price as a dependent
variable was significant at 1 per cent, implying the existence of causation from stock price
to international oil price in the long run. The ECT has its correct sign (that is negative sign)
indicating a move back towards equilibrium and the coefficient estimate of the ECT of
-0.06 indicated that the relationship between stock price and international oil price will
converge towards its long-run equilibrium at a very slow pace. In the short run, no evi-
dence of causality was observed from stock price to international oil price. The implica-
tion of the above findings suggests the existence of a unidirectional causality between
international oil price and stock price in the long run with causation running from stock
price to international oil price. This result is supported by the findings of Bhunia (2012).

4.4 Effect of domestic oil price on stock price

Long-run cointegration between stock price and domestic oil price equation
The long-run cointegration domestic oil price equation revealed that domestic oil price,
interest rate and real gross domestic product were also significant determinant of stock
market price in Nigeria. Contrary to the result on international oil price, it was observed
that there is a 0.71 per cent negative change in stock market price due to 1 per cent change
in domestic oil price in the long run. It was also observed that there is a 0.099 per cent and
1.84 per cent negative change in stock market price due to 1 per cent change in short-term
interest rate and real gross domestic product, respectively. Base on the cointegration test

© 2014 Organization of the Petroleum Exporting Countries OPEC Energy Review March 2014
70 Philip Ifeakachukwu Nwosa

and result of the cointegration equation, it was concluded that there exist a negative rela-
tionship between domestic oil price and stock market price in Nigeria in the long run.
Model II: Long Run Cointegration Domestic Oil Price Equation:

LSPt = 15.57 − 0.711LDOPt −1 − 0.099 ITRt −1 − 1.844 LRGDPt −1 + ε t

t: [ −10.744 ] * [ −5.272] * [ −5.108] *
SE : (0.066 ) (0.019) (0.361)

Note: * implies 1% significance level.

VECM causality estimate on domestic oil price and stock price

With respect to the causal nexus between domestic oil price and stock price on Table 4, it
was observed that the ECT for cointegrating equations with stock price as dependent vari-
able was significant at 5 per cent, implying the existence of causation from domestic oil
price to stock price in the long run. The ECT has its correct sign (that is negative sign) indi-
cating a move back towards equilibrium and the coefficient estimate of the ECT of -0.099
indicates that the relationship between domestic oil price and stock price variables will
converge towards its long-run equilibrium at a very slow pace. However, the ECT for
cointegrating equation with domestic oil price as a dependent variable was insignificant,
implying no causality from stock market price to domestic oil price in the long run. Simi-
larly, no evidence of causality was observed from stock price to domestic oil price in the
short run. The implication of the above findings suggests the existence of a unidirectional

Table 4 VECM causality estimate

Dependent variables

1 2 3 4
Independent
variables DLSP DLDOP DITR DLRGDP
DLSP — -0.054 [-0.288] -1.132 [-0.796] 0.003 [0.097]
DLDOP -0.027 [-0.418] — -1.915 [-2.216]** -0.038 [-1.849]
DITR -0.004 [-0.512] -0.004 [-0.253] — -0.003 [-1.177]
DLRGDP -0.665 [-2.470]** 0.158 [0.323] 3.204 [0.872] —
ECT -0.099 [-2.730]** 0.023 [0.348] 1.456 [2.947] -0.045 [-3.864]*
Source: Author’s computation.
Notes: Numbers above parentheses are coefficient values while numbers in the parentheses are
t-statistics values. * and ** denote significance at 1% and 5%, respectively.

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 Oil prices and stock market price in Nigeria 71

causality between domestic oil price and stock price in the long run with causation running
from domestic oil price to stock market price.

5. Conclusion and policy recommendation

This study examined the relationship between oil prices (international oil price and
domestic oil price) and stock market price in Nigeria for the period spanning March 1985
to December 2010. Given the result of the unit root test, the Johansen’s multivariate
cointegration test was utilised, and it was revealed that the variables were cointegrated. The
cointegration estimate revealed that the two measures of oil price (that is international oil
price and domestic oil price) were significant determinant of stock market price in the long
run in Nigeria. The existence of cointegration led to the estimation of a VECM. The cau-
sality estimate from the VECM model revealed a unidirectional causality between IOP and
stock market price in the long run with causation running from stock price to international
oil price, while in the short run, no evidence of causality was observed between the two
variables. With respect to the causal nexus between domestic oil price and stock price, it
was observed that a unidirectional causality exists between domestic oil price and stock
price in the long run with causation running from domestic oil price to stock market price.
No evidence of causation was also observed in the short run.
Drawing from the above findings, it was concluded that international oil price and
domestic oil price were significant determinant of stock market price in Nigeria. Based
VECM estimate on domestic oil price and stock market price, it was deduced that past
domestic oil price review may have adversely affected the performance of firms in Nige-
rian given their high dependence on domestic oil for power generation in the production
process. Based on the above, the following recommendations were offered:
Policymakers, financial analyst and shareholders should into cognizance changes in
international oil price and domestic oil price in their financial decisions because these vari-
ables have significant impact on stock price in Nigeria.
Government should take serious caution in the implementation of the subsidy
removal policy and also in the deregulation of the downstream sector of the oil price as
increase in the price of domestic fuel price resulting from these policies would have
serious adverse impact on stock price and consequently on stock returns. Furthermore,
utmost caution should be taken on future domestic oil price review, because the negative
impact of domestic oil price on stock market price acts as a disincentive to potential
investors, thereby limiting the objective of the stock market in channelling of fund for
developmental purposes.
Given the long-run causal nexus from domestic oil price to stock market price, there
is the need for appropriate policy to ensure stable power supply. This would reduce the
high dependence of firms on domestic oil and would also reduce substantially the adverse

© 2014 Organization of the Petroleum Exporting Countries OPEC Energy Review March 2014
72 Philip Ifeakachukwu Nwosa

consequence of upward reviews domestic oil price on production costs of firms. Such
reduction in production cost will increase firms’ profit and hopefully increase stock price
and stock returns.
Finally, there is the need for concrete policy on the use of renewable energy resources
(such as solar, geothermal and wind energies). The use of these sources of energy would
reduce the dependency of firms on domestic oil for productive activities and also limit the
adverse effect of future of oil price increase.

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