The global financial crisis: Testing For Fractional Cointegration Between The Us And Nigerian Stock Markets

Resumen

As a result of the dependency of United States (US) on Nigerian oil exports, coupled with her greatest share in Nigerian foreign direct investment, the recent global financial crisis of 2008/09 which emanated from the country spilled over to the Nigerian capital market, affecting majorly the financial sectors. Since the period of the crisis, the interests of the researchers have been gingered towards studying the interdependencies in financial market series of nations that are trading partners, particularly in relation to technological advanced economies like the US and the United Kingdom. This paper examines the effects of the global financial crisis on the Nigerian stock market. We use daily US stocks (S&P500, Nasdaq and Dow Jones industrial stock indices) and All Share Index (ASI) of Nigerian Stock Exchange, testing for long run equilibrium relationships between the Nigerian ASI and each of the US indices. Apart from the initial nonstationarities displayed by the stock time series, plots of a US stock index and ASI also display the possibility of possible co-movement over time, particularly during the crisis period. That called for possible test for cointegration. However, instead of restricting ourselves to integer degrees of differentiation we allow for the possibility of fractional values. Thus, we test for fractional integration, and the results first indicate that the ASI and the three US stock indices display similar orders of integration, which are all very close to 1. Testing for fractional cointegration, we do not find any significant evidence of a long run equilibrium relationship between the two markets. The lack of fractional cointegration can be due to the presence of breaks in the data that have not been taken into account. This is something very plausible in the context of the global financial crisis. Also, the fact that long-run relationships do not exist between each of the US stocks and the Nigerian stock markets does not imply no contagion effect. Contagion effect may be as forms of returns, shocks or volatility between the US and Nigeria market. This finding therefore calls for alternative testing procedure, other than cointegration, in other to establish the influence of United States economy on the Nigerian capital market.