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The history of stock trading and trading associations can be traced
as far back as the 11th century when Jewish and Muslim merchants
set up trade associations. After centuries of evolution, stock markets
have become the symbol of commerce in the modern world. It
operates in various countries and trades a range of securities. The
world stock market capitalisation is estimated to be about $ 36.6
Trillion. The stock market has various functions such as capital
mobilisation, investing opportunities, risk distribution etc. The major
stock exchanges in the world today include New York Stock
Exchange, London Stock Exchange, Frankfurt Stock Exchange,
Italian Stock Exchange, Hong Kong Stock Exchange and Tokyo Stock

There have been various stock market crashes in the past such as
the Wall Street crash of 1929, the crash of 1973/74, the 1987 crash;
called black Monday, the dotcom bubble of 2000 and the more
recent crash in 2008 caused by the subprime mortgage crisis in
America. The economic crisis of 2008 which originated in America
spread to various economies in the world and their stock markets
were affected. It reduced the value of stocks around the world by as
much as 41% and affected both major and emerging stock markets.
The Nigerian stock market is an emerging market in Africa. After
attaining the position of one of the most profitable, efficient and

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fastest growing equity market in the world, with a return on
investment of up to 78% in 2007 the Nigerian Stock Exchange (NSE)
was seen as an investment haven.
On reaching an all time high of 66,371.2 points and N12.6 Trillion in
market capitalisation in March 2008 the Nigerian Stock Market
(NSM) began to plummet. By March 2009 a year later, the NSE had
lost about 60% of its value and was left with a market capitalisation
of N4.6 Trillion, sending all the stake holders into panic.

A stock market is a place where stocks and securities can be
exchanged or sold from one owner to another. It is a place where
buyers and sellers of securities meet. The process of buying and
selling is called trading.
Stock markets are divided into both primary and secondary
markets. The primary market deals with the listing of new
companies on the exchange, these companies usually want to raise
finance. The secondary market deals with buying and selling
existing securities. It accounts for the majority of the transactions
that take place in the stock market.
There are various participants in stock markets. There are investors,
brokers and market makers. The investors can be individuals or
institutional bodies that trade either on their own behalf or on behalf
of other investors. Broker’s act as agents who try to carry out trades
on behalf of their clients at the best possible price, the brokers also
offer investment advice and research services. The market maker is
a dealer that quotes both buy and sell prices of securities on a
continual basis, if it is unable to find counterparties for a buy or sell
order; they have to be prepared to take an open position.
The stock market reflects and magnifies all economic flaws. When
the economy looks good, the stock market performs well and when
the economy goes bad, the stock market reflects it as well.

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A market crash is a large and sudden drop in asset prices. Market
crashes are usually accompanied by large selling pressures in the
market. The drop in asset prices occurs really quickly while the
recovery is a slow process.

A financial crisis is a disruption to financial markets which hinders
the market’s capacity to allocate capital. According to Portes and
Vines (1997) all crisis are “crisis of success” because initially the
capital inflow into the market is a sign of economic promise and
success but this inflow is usually unsustainable.


When there is a financial crisis in an emerging market such as
Nigeria. It results in a series of chaos. An economy which has
benefited from large capital inflows stops receiving such inflows and
faces a sudden reversal of capital flow. Financial crisis in emerging
markets are usually accompanied by difficulties of the concerned
party to honour its contractual responsibilities to foreign investors.
The anticipation of such difficulties could set off disorderly actions if
investors rush to take out their investment from the crisis country.


The efficiency of a market could be looked at from a variety of view
points. It could be an allocative, operational or informational
efficiency. Allocative efficiency has to do with how well a market
allocates scarce capital resources amongst competitors in order for
them to be used most productively. In an ideal situation capital

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would be allocated to firms that can achieve the best marginal
A market is operationally efficient if the transaction costs of
operating the market are determined competitively. In an ideal
situation investors will pay minimal transaction costs and
competition between brokers would ensure that only normal profits
are earned on their activities. A strict adherence to operational
efficiency will mean that transaction costs of making a market are
zero, this however is unrealistic because markets will not exist if the
people who operate them are not rewarded for doing so.
A market is informationally efficient if the current market price of a
security instantly and fully reflects the all relevant available
A market is said to be perfectly efficient if it is concurrently
allocatively efficient, operationally efficient and informationally


In my research I intend to look at the reasons for the collapse of the
Nigerian Stock Market, the effects of the global economic crisis on
the NSM and also the other challenges faced by the Nigerian Stock
Market as an emerging markets as stipulated by Pettis (2001). My
aims and objectives are
1. To review extant conceptual models and theoretical
frameworks related to evolutionary trends of the Nigerian
Stock Market.
2. To identify the cause of the present crisis in the Nigerian Stock
Market and relate it to past crashes in global stock markets.
3. To examine the characteristics of the recent downward trend
in the Nigerian Stock Market in relation to financial crisis in
emerging markets.
4. To recommend solutions based on my research that will help
to predict and prevent financial crisis.

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In order to guide my inquiry and shed more light on my research
into the downward trend in the Nigerian Stock Market I intent to
answer the following research questions:
1. How does previous crashes in global stock markets relate to
the present crisis in the Nigerian Stock Market?
2. What are the causes of the downward trend in the Nigerian
Stock Market?
3. Is the NSM crisis as a result of the global financial crisis or is it
a challenge faced by emerging markets?

As shown in Feridun (2004), the literature on financial crisis is
classified into three models namely first-generation models, second-
generation models and third-generation models. The first generation
model Krugman (1979), Flood and Garber (1984) explains that “a
government with continual money-financed budget deficits is
believed to use a restricted stock of reserves to peg its exchange
rate and the attempts of investors to anticipate the inevitable
collapse generates a speculative attack on the currency when
reserves fall to some critical level”.

The Importance of investor’s beliefs was highlighted in the second

generation model, Obstfeld (1994) (1996), Radelet and Sachs (1998)
Ozkan and Sutherland (1995) all agreed that “policy is less
mechanical: a government decides whether or not to defend a
pegged exchange rate by making a trade off between short-run
macroeconomic flexibility and longer-term credibility”. The crisis
then starts from the fact that defending parity is more expensive as

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it requires higher interest rates. Should the market believe that the
defence will ultimately fail, a speculative attack on a currency
develops either as a result of a predicted future deterioration in
macro fundamentals, or purely through self-fulfilling prediction
(Vlaar, 2000).
The third generation model which came about in the 1990’s after
the Mexican tequila crisis of 1994 and the Asian crisis of 1997.
Dooley (1997) Krugman (1998) Radelet and Sachs (1998) classified
it into three different groups which are moral hazard, herd
behaviour and contagion. Moral hazard emphasises mainly on
“liquidity shocks” as an explanations of financial crisis. Herd
behaviour which was developed by Banerjee (1992) and
Bikchchandani et al (1992) complements the logic in the second
generation models by illustrating a mechanism where large
expectation shift occur due to a small injection of new, possibly
wrong information. This theory leads to an emphasis on the
informational transparency in markets to prevent financial crisis.
The contagion model comes in a variety of theoretical forms and has
been subjected to a large amount of empirical testing and scrutiny.
Contagion is “the cross-country transmission of shocks or the
general cross-country spill over effects”. Contagion can take place
both during "good" times and "bad" times. Then, contagion does not
need to be related to crises. However, contagion has been
emphasized during crisis times.

The recent efforts at developing an early warning system for a

looming financial crisis have taken the form of two related
approaches which are probit/logit model or signalling model. The
probit/logit model was pioneered by Frankel and Rose (1996), they
used limited dependent variable models known as probit or logit
regressions to identify the causes of crisis and to predict future
crisis. The signals approach was developed by Kaminsky et al
(1998), and it consists of a bilateral model where a set of high

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frequency economic variables during a specified period is
compared, one at a time with a crisis index so that when one of
these variables deviates from its normal level beyond a specific
threshold value prior to a crisis it issues binary signals for a possible
currency crisis.

The statement that market prices instantaneously and fully reflect

all relevant available information is known as the efficient market
hypothesis. Fama (1970) provided an operational base for testing
market efficiency by distinguishing between three types of
efficiency: weak-form efficiency, semi-strong-form efficiency and
strong-form efficiency. According to Fama (1970):
“A market is said to be weak-form efficient if the current prices of
securities instantly and fully reflect all information of the past
history of security prices. A market is said to be semi-strong-form
efficient if the current prices of the securities instantly and fully
reflect all publicly available information. A market is said to be
strong-form efficient if the current price of securities instantly and
fully reflects all information, both public and private”.

Research is an essential part of academics, “research is the
systematic study of materials and sources etc. in order to establish
facts and reach new conclusions” (Oxford Concise Dictionary). The
process by which a research is written or carried out is very
important because it has a huge impact on the conclusions reached
at the end of the research. There are two major research
philosophies which underpin the research strategy and the method
that will be used to carry out a research (Collis and Hussey, 2009).
They are the positivism and interpretivism research paradigm.

Positivism involves “working with an observable social reality and

that the end product of such research can be law-like

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generalisations similar to those produced by the physical and
natural scientists”, the assumption is that “the researcher is
independent of and neither affects nor is affected by the subject of
the research” (Remeneyi et al, 1998:32). Interpretivism is “a
philosophical position which is concerned with understanding the
way we as humans make sense of the world around us, the
underlying assumption is that by placing people in their social
context, there is greater opportunity to understand the perceptions
they have of their own activities” (Hussey and Hussey, 1997).

The paradigm adopted contains important assumptions about the

way the researcher views the world Saunders et al (2007), in
conducting this research, I will employ the positivist paradigm
because by using a reality which is separate from my knowledge of
the area, it provides an objective reality against which researchers
and other stakeholders in the Nigerian Stock Market can compare
claims and ascertain the truth. The positivist paradigm will also
make it possible for my results to be applied externally and more
broadly outside the study context because it will be reliable and
unbiased. I will be detached from my research and have little or no
influence on the data collected. The research will be undertaken in a
value free way because irrespective of what I feel or think, I cannot
change or alter the facts about the collapse of the Nigerian Stock

The research strategy that will be used is the case study which
according to Robson (2002:178) is “a strategy for doing research
which involves an empirical investigation of a particular
contemporary phenomenon within its real life context using multiple
sources of evidence”. The case study strategy will be very good for
this research because it will give the much needed in depth
understanding into the collapse of the Nigerian Stock Market. Since
a case study is closely aligned with an interpretivist perspective, the

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proposed study will triangulate survey with case study. The primary
benefit of this triangulation is that survey will flesh out larger data
collection than case study which emphasises on a smaller scale.
Research methodologies can either be quantitative or qualitative,
quantitative is the use of numerical data or data that have been
quantified while qualitative is the use of non-numerical data or data
that have not been quantified. Quantitative and qualitative data
collection techniques and analysis procedures each have their own
strengths and weaknesses (Smith, 1975). In order to seek
convergence of results this research will be triangulated because I
will use both qualitative and quantitative research methodologies.
The findings from the quantitative will help to validate the findings
from the qualitative thereby making the research more reliable and
credible. The application of these two methods allows them to
counter balance the strengths of each other. Tashakkori and Teddlie
(2003) say that “multiple methods are useful because they provide
better opportunities to answer research questions and better
evaluate the extent to which research findings can be trusted and
inferences made from them”.

For the purpose of this research, I will be making use of secondary
data. Secondary data is data that have already been collected for
some other purpose, perhaps processed and subsequently stored
(Saunders, et al 2007). There are three main types of secondary
data: documentary, survey and those from multiple sources. I will
use data such as previous share prices, public offers, market
capitalisation etc. of various companies quoted on the Nigerian
Stock Exchange. I will focus on the banking sector which is a major
player in the Nigerian Stock Market and examine the trends that
took place in the sector and its overall effect on the Nigerian Stock
Market. Interviews will also be used as a data collection method;
this will help to get well-founded and reliable data that is relevant to

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my research aims and objectives and also help to answer the
research questions. An interview is a purposeful discussion between
two or more people (Kahn and Cannell, 1957). Interviews can be
structured, semi- structured or unstructured. A structured interview
is a data collection technique in which an interviewer actually meets
the respondents, reads them the same set of questions in a
prearranged order and records their reply to each question. A semi-
structured interview is a type of interview where the interviewer
starts with a set of interview topics but is ready to vary the order in
which the questions are asked and to can ask new questions in the
framework of the research circumstances. An unstructured interview
is an informally conducted interview that may commence with one
or more subject matter to discuss with the participants but without a
predetermined list of questions to work through.

Semi-structured and unstructured interviews will be used for this

research because the semi-structured interviews will allow me to
get answers to precise areas of the research that needs clarification
and are specific to each respondent while the unstructured
interviews which will be less restricted will allow the interviewee to
express their opinions freely and give me the opportunity to get
information that could be useful to my research which I don’t
necessarily know exists. Also, a lot of the opinions regarding the
crash of the Nigerian Stock Market vary from person to person; the
unstructured interview will give me the opportunity to get in-depth
and varied response from the various respondents.
I will interview
• Representatives of regulatory bodies
• Representatives of corporate organisations
• Stock brokers and analysts
• Shareholders and investors

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Data analysis is a process that aims to describe facts, identify
patterns, develop explanations and test hypothesis. All of these help
to highlight vital information and recommend conclusions which
help in decision making processes. Data can be analysed using
various methods such as content analysis, theoretical sampling,
thematic analysis, grounded theory etc. Bernard (1952) defined
content analysis as "a research technique for the objective,
systematic, and quantitative description of manifest content of
communications". Thematic analysis is an approach to dealing with
data that involves the creation and application of ‘codes’ to data,
there is a link between this method and the grounded theory
method. Grounded theory was discovered by Glaser and Strauss
(1967) as a method of analyzing data, it is a systematic analysis of
data that aims to develop a higher level of understanding or
generate theories regarding a social phenomenon. The grounded
theory approach will be used for this research because it will help to
analyse the information gathered into a clearly defined hypothesis
that will explain the reason for the crash of the Nigerian Stock
Market. Data will be analysed using the axial coding which will help
to identify relationships between the various categories of data
through a combination of inductive and deductive thinking.

The quantitative data such as market capitalisation, return on

capital, liquidity, market efficiency and various macroeconomic
variables which are linked to the collapse will be analysed using the
chi square and the analysis of variance. I will compare these
variables over a period of three years and across various sectors in
the Nigerian Stock Market. For each variable, I will analyse its
behaviour during the crisis and pre-crisis period and compare it with
its behaviour during a non crisis period using a regression analysis.
After the data analysis I aim to show that there is a relationship
between some key economic/financial variables and the

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performance of the Nigerian Stock Market. I also intend to
demonstrate that the downward trend experienced in the Nigerian
Stock Market was due to the challenges faced by emerging markets.

Research ethics relates to questions about how we formulate and
clarify our research topic, the data collection and processing method
and how we report our research findings in a moral and responsible
way. The appropriateness of a researcher’s behaviour in relation to
the rights of those who become subject of their work or are affected
by their work is referred to as research ethics (Saunders et al,
2007). Although all research methods have specific ethical issues
associated with them, qualitative research is likely to have a greater
range of ethical concerns compared to quantitative research. Most
of the data that will be used in conducting this research will be
quantitative data. The quantitative information’s are readily and
publicly available without any form of moral or ethical intrusion. I
will get the qualitative information the use of semi-structured and
unstructured interviews. The respondents will be voluntary
participants because they won’t de coerced into participating in the
research; they will be given full information regarding the procedure
and risk involved in participating thereby giving an informed
consent. The confidentiality and anonymity of the participant will
also be respected, except an agreed approval is given by the
respondent for his or her identity to be declared.

This research will highlight the macro economical and micro
economical factors responsible for the downward trend in the
Nigerian Stock Market and develop a link between these factors and

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the collapse of the market. A proposition that will help prevent or
forecast an imminent collapse will also be put forward.

Proposal presentation –------------------------1st April 2009
Written project proposal (draft)-------------- 15th April 2009
Written project proposal (final)----------------19th June 2009
Information and data collection----------------June 2009
Interviews with various stakeholders----------June/July 2009
Analysis of the information collected----------July 2009
Final writing of the dissertation-----------------August 2009
Submission –--------------------------------------End of August 2009


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