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SAMPLE COPY
RESEARCH
PROPOSAL
PROPOSED RESEARCH TITLE:
AN
INVESTIGATION
INTO
THE
DOWNWARD
TREND
IN
GLOBAL
STOCK
MARKETS: A CASE STUDY
OF THE NIGERIAN STOCK MARKET
RESEARCH BRIEF
The history
of stock trading and trading associations can be
traced as far back
as
the
11
th
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 Exchange.
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
fastest
Dr
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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.
STOCK MARKETS
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
b
ehalf 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.
Dr
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MARKET CRASH
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.
FINANCIAL CRISIS
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.
FINANCIAL CRISIS IN EMERGING MARKETS
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.
EFFICIENCY OF FINANCIAL
MARKETS
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
would
be
allocated
to
firms
that
can
achieve
the
best
marginal returns.
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
Dr Wilson/Research
Proposal Sample/Student’s Copy/2010
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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 information.
A
market
is
said
to
be
perfectly
efficient
if
it
is
concurrently
allocatively
efficient, operationally efficient and
informationally efficient.
RESEARCH AIMS AND OBJECTIVES
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.
RESEARCH QUESTIONS
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?
Dr
Wilson/Research Proposal Sample/Student’s
Copy/2010
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LITERATURE REVIEW:
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
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
Dr Wilson/Research Proposal
Sample/Student’s Copy/2010
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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
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
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
”
.
Dr Wilson/Research Proposal
Sample/Student’s Copy/2010
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RESEARCH
METHODOLOGY:
Research is
an
essential part of academics, “r
esearch
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
generalisations
similar
to
those
produced
by the physic
al and natural
scientists”, the assumption is that “the
researcher is independent of and
neither affects nor is affected by the subject
o
f 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
Dr Wilson/Research
Proposal Sample/Student’s Copy/2010
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