Do Sunspots and Bubbles Matter in the Capital Market? An Empirical Assessment from the Emerging Economy of Nigeria

Abstract

The devastating implications of bubbles in an economy cannot be over emphasized. They erode the value of assets when market correction is observed. The empirical test and analyses of bubbles occurrence in the capital is yet to gain significant attention in the Nigeria clime. Against this background, this study assessed literature on sunspots and then empirically analyzed the existence of speculative bubbles with evidence from the Nigerian capital market. The study used data of remittances inflows (REMITR and foreign porfolio inflows (FPI) in the period 1990 to 2018. The surge and drastic decline of these financial assets within these periods informed the choice to empirically determine if it was speculative bubble driven and influenced. The Augmented Dickey Fuller unit mot and co-integration analyses were employed to validate the existence and likelihood of speculative bubble in the capital market of Nigeria. The empirical result is quite revealing in that it confirmed the existence and likelihood of speculative bubbles of the financial assets in the Nigerian capital market. The study recommends that investors in the capital market need to take caution in their investment decision regarding portfolio/securities in order to avoid loss of wealth and output. Investors should always understudy markets trends and the causes in an economy prior to committing their financial resources as this could save them from the consequences of losing their wealth in risky assets whose prices may or may not fundamentally be driven in the financial market. The study contributed to knowledge in the context of developing countries' like Nigeria in that it has established the existence and likelihood of speculative bubbles connected with foreign portfolio inflows and remittance inflows. It is suggested that future researchers need to focus research attention on the implication of remittances inflows on inflation and other monetary policy transmission mechanisms. As this will guide policy makers in fashioning out effective policies to gauge or carry out impact assessment in varying aspects of the Nigerian economy.