| Summary: | Changes in macroeconomic variables as a result of macroeconomic shocks are fundamental problems associated with the stock exchange market. Accordingly, this study attempts to provide an empirical investigation on the relationship between stock market returns and macroeconomic variables in order to enhance the ability of economic agents in the analysis of stock market performance in Nigeria by using Autoregressive Distributed Lag (ARDL) and Vector Autoregressive Model (V AR). Annual time series data of six variables namely; broad money supply, nominal effective exchange rate, short term treasury bills rate, foreign direct investment, gross domestic per capital income, and gross domestic saving from 1984-2013 are employed to analyse the existence of the short-run and long-run relationship between the selected macroeconomic variables and stock market returns. The results from the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests of stationarity indicated that all the variables are non-stationary at level 1(0) but stationary at first difference 1(1). The Bound test procedure also revealed that the stock market returns and the macroeconomic variables are cointegrated and, thus, a long-run equilibrium relationship exists between them. Likewise, the Granger causality tests showed that some of the macroeconomic variables are having bi-directional causality with the stock market returns, while others have unidirectional causality. Furthermore, the impulse response function indicated that the impact of shocks in broad money supply, nominal effective exchange rate, gross domestic per capita income and short-term treasury bill rate on the stock market returns are consistent with other stock market empirical results. The variance decomposition test indicated that the stock market returns can be explained by gross domestic saving and nominal effective exchange rate. As a result, policy makers, financial institutions and private investors are recommended to take into consideration macroeconomic indicators when formulating financial and economic policies, diversification strategies, portfolio allocation and rebalancing.
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