ANALYZING THE IMPACT OF ECONOMIC INDICATORS ON STOCK MARKET PERFORMANCE USING MULTIVARIATE ANALYSIS

Chapter One

Introduction

1.1 Background of the Study

“The stock market is often considered a barometer of economic health” (Osisanwo & Atanda, 2012), with its performance reflecting both the current state and future expectations of a country's economy. The relationship between macroeconomic variables and stock prices has been a central theme in financial research for decades. Economic indicators such as gross domestic product (GDP), unemployment rates, and inflation provide critical insights into the fundamental health of an economy(Okonkwo et al., 2014).

These indicators, which are routinely released by government agencies and private organizations, are eagerly watched by investors, analysts, and policymakers. The interplay between these indicators and the stock market is complex, as markets react not only to the data itself but also to how the data compares to expectations and how it influences future monetary policy. A comprehensive understanding requires moving beyond simple, single-variable models to a more integrated, multivariate perspective.

According to Onoh et al., 2021, “the Nigerian stock market plays a crucial role in the country’s economic development, serving as a platform for raising capital, promoting investment, and facilitating economic growth”. Stock market performance is influenced by macroeconomic indicators such as inflation, exchange rates, interest rates, and money supply. Understanding the collective impact of these factors is vital for investors, policymakers, and analysts in making informed decisions.

1. Statement of the Problem

While numerous studies have demonstrated a correlation between individual economic indicators and stock market movements (Osisanwo & Atanda, 2012; Onoh et al., 2021), these analyses often fail to capture the holistic and simultaneous influence of a range of economic factors. A single economic indicator rarely acts in isolation; rather, a complex web of interconnected macroeconomic variables collectively shapes market sentiment and, consequently, stock market performance. Ignoring these interdependencies by using univariate or simple regression models can lead to a simplified and potentially misleading view of the true relationship. The problem, therefore, is the lack of a comprehensive analytical framework that can simultaneously assess the combined effect of multiple economic indicators on multiple aspects of stock market performance, such as returns, volatility, and trading growth volume.

While many studies in Nigeria have examined the effect of macroeconomic indicators on stock market performance, most have used univariate or single-equation regression approaches. This may overlook the fact that stock market performance is multidimensional covering returns, volatility, and trading volume growth simultaneously. Ignoring this interdependence can lead to incomplete or biased inferences.

1.3 Aim and Objectives

This study aims to analyze the impact of selected macroeconomic indicators on multiple dimensions of Nigerian stock market performance using Multivariate Multiple Regression Analysis (MMRA). The specific objectives are:
1. To evaluate how inflation, monetary policy rate, exchange rate, and money supply jointly influence stock returns, volatility, and trading volume growth.
2. To assess the statistical significance of each macroeconomic variable in explaining stock market performance indicators.
3. To provide policy and investment recommendations based on the findings.

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