Keywords

COVID-19; Pandemic; Financial market.

Introduction

The contribution of a nation's financial market in mobilizing public and private savings for productive investments cannot be overemphasized. The Nigerian financial market is an institutional framework that facilitates the intermediation of funds in an economy. Intermediation is done through the process of mobilization of financial resources from the surplus unit of the economy to the deficit unit of the economy for productive purposes. According to Ayodele (2014), the economic development of any country depends mainly on the number of investible funds available to the country and the efficiency of her financial intermediaries to mobilize such funds.

In Nigeria, the financial market comprises of the money market, which trades in money at call, certificates of deposit, promising notes, commercial papers and so on; the capital market, which specializes in trading in long term loanable funds and the foreign exchange market, which deals with the determination of the ratio of the local currency to its counterpart foreign currency, especially in fostering international trade and transactions. The performance of the financial market depends mostly on the prevailing condition of the economy within which it operates. Factors such as regulation, speculation, shocks, political instability and other risks will inevitably affect the effectiveness of and performance of the players in the market and the overall intermediation process (Adeusi & Ayodele, 2009).

In recent time, there has been an outbreak of a pandemic disease called Corona Virus (COVID-19), which has caused many deaths globally. The disease was first discovered in China around December 2019. The disease was confirmed in Nigeria on February 27th 2020, by the Virology laboratory of the Lagos University Teaching Hospital (LUTH) in Lagos. Confirmed cases recorded in Nigeria led to the lockdown of many states of the federation through the pronouncement of the Federal Government.

Nigerian banks and other financial institutions have been rendering skeletal services to customers since the 20th of March 2020 because an assembly of more than fifty persons has been prohibited. This decision has also paralyzed the general trading, transportation, educational system, and production sector of the economy. Before the lockdown of the Nigerian economy, the news about the pandemic outbreak in China was assumed to have inflicted negatively on the country’s financial market, especially the foreign exchange segment, before others. This is because the Nigerian economy depends on a large proportion of imported goods from China, the home incubator of the disease. Besides, the world is a global village where information is transmitted in seconds through the usage of the internet. Even labour has become very mobile around the globe. Therefore, any panic or obstruction from any part of the world is likely to affect the effectiveness and efficiency of another independent economy.

Several international organizations have estimated the likely impact of the COVID-19 pandemic on the global economy. The United Nation Department of Economics and Social Affairs (UNDESA) forecasted that the world economy is expected to contract by one percent at the end of 2020 as a result of the pandemic. International Labor Organizations (ILO) predicted a surge in the unemployment rate to 24.7millions. Furthermore, the World Trade Organization (WTO) also estimated a decline in the global trade index to values ranging between 13 pecent and 32 percent (Kawamorita et al., 2020). It is on this note that the researchers deemed it fit to investigate the effect (if any) of the COVID-19 pandemic outbreak on the performance of the Nigerian money market, the Nigerian capital market, and the Nigerian foreign exchange market.

The rest of the paper is arranged thus; section two consists of the reviews of relevant literature; section three focuses on the materials and methods for the study, while section four provides the results of the data analysis and discussion of findings. Finally, section five presents the conclusion and policy recommendations.

Literature Review

The first outbreak of the coronavirus (COVID-19) was witnessed in Wuhan, a city in China. This was in December 2019, and since then, the virus has spread worldwide (Mazzoleni et al., 2020). As a result of the spread of the pandemic, the Nigerian government directed the lockdown and movement restrictions in Lagos state, Ogun state and the federal capital territory (Abuja) with effect from Monday, March 30th 2020, starting from 23:00. This scenario paralysed many activities in all sectors of the federation as each state governor also toed the line of the federal government. However, there was an ease in the lockdown from May 2nd 2020. The pandemic, however, did not have a terrible effect on Nigerians thus it may not be unconnected to the fact that people in the tropical region like Nigeria had battled with Ebola and Lassa fever and probably are prepared or immune against some virus and the weather (Domjan, 2020).

Researchers have postulated theories on the relationship between the financial market and changes resulting from economic, social and health factors. The COVID-19 pandemic is a health factor that has changed the global economy due to limitations and restrictions on economic activities. The neoclassical growth theory, postulated by Solow (1957), stated that the financial market's performance depends on exogenous factors such as labour mobility, technological changes, and economic stability (Edame, 2013). The theory suggests that changes in any of these exogenous factors affect the financial market. However, as reported by Gokal and Hanif (2004), the endogenous growth theory argues that policy measures on production process such as economies of scale and increasing returns influence the performance of the financial market. Both the endogenous and exogenous theories provided the theoretical framework for this study.

Salamzadeh and Dana (2020) investigated the effect of COVID-19 pandemic on Iranian startups. The authors identified six significant challenges that the pandemic has brought on Iran's economy. These challenges include financial challenges, market challenges, and crisis management, among others. Zhang, Hu, and Ji (2020) opine that the quick spread of COVID-19 dramatically impacts financial markets by generating an unprecedented level of risk, resulting in significant losses for investors in a short time. The authors utilised daily data to explore the patterns of stock market reactions and ascertained that the pandemic has a strong influence on stock markets. This was done by analysing the potential consequence of policy interventions and accessing the impact of these policies. The longer-term consequences of this pandemic may arise from mass unemployment and business failures. The research concluded that the risk levels of all the countries had increased substantially.

While the exact global economic impacts are not yet clear, financial markets have already responded with unusual movement due to long-term expectations (Gormsen & Koijen, 2020). It is almost certain that emotional factors play essential roles. The market sentiment in response to the outbreak can be quickly amplified through social media, which then stimulate trade activities and cause extreme price movements. The financial markets have seen dramatic movement on an unprecedented scale. The considerable uncertainty of the pandemic and its associated economic losses has caused markets to become highly volatile and unpredictable.

According to Adrian and Natalucci (2020), COVID-19 pandemic has led to an unprecedented crisis in human health. The necessary measures to contain the virus triggered an economic downturn. The financial system has already changed significantly, which could result in global financial stability. Investor sentiment has stabilised in recent weeks, actions aimed at containing the fallout from the pandemic. Emerging markets are at risk of bearing the most massive burden, as so often happens in times of financial distress.

Enrico Onali (2020) investigated the impact of COVID-19 cases and related deaths in the U.S. with the stock market and suggested that the number of reported deaths in Italy and France negatively impacted the stock market returns. Baldwin and Weder di Mauro (2020) utilized an exogenous shock to examine the role of uncertainty in selecting locations for informed and uninformed traders on the financial markets. This also helps us capture market share dynamics, dark pool volume as the business volatility generated by COVID-19 grows, and eventually analyze the case's business-quality implications.

Materials and Methods

The study focused on the Short-term effect of the COVID-19 pandemic on the Nigerian financial market by exploring time-series data for 120 working days after the first confirmed case in the country. The 120 working days are combinations of lockdown periods and post lockdown periods in Nigeria. The study utilised exploratory analysis and linear multiple regression analysis to evaluate the effect of COVID-19 (proxy by the number of confirmed cases) on the Nigerian financial market (money market, capital market and foreign exchange market).

Quantitative data were used in this study. The money market data were sourced and extracted from the central bank of Nigeria Inter-Bank daily Rates website (https://www.cbn.gov.ng/rates/interbankrates.asp), the capital market data were sourced and extracted from the Nigerian stock exchange website (https://ng.investing.com/indices/nse-all-share- historical-data), while the foreign exchange market data were sourced and extracted from the Nigerian parallel market website (https://www.exchangerates.org.uk/USD-NGN-exchange-rate- history.html) Table 1.

Operational Measures of Variables

The multiple regression models for the hypothesized variables are specified below;

Where,

β0 = constant or intercept

β0 to β2 = regression coefficients

e = error term

The time-series data representing the variables in the model were subjected to the unit root test and the co-integration test in order to determine if they are stationary. The Ordinary Least Squares (OLS) technique was further used to estimate the parameters of the regression models.

Results and Discusson

Unit Root Test

The results of the ADF-Fisher unit root test reveal that all the variables are stationary. The variables OBBR, logASIV and logCvd are stationary at both their level form and after their 1^st difference, with t-statistics which are significant at the 5% level (p < 0.05). However, PFXM is only stationary after the 1^st diff., as revealed by the p-value of its t-statistic, which is significant at the 5% level. Based on these results, we can therefore conclude that all the variables are suitable for a regression model (Table 2).

The Johansen co-integration test has a null hypothesis which says “no co-integrating equations”. The results of the Trace test and Max-Eigen test in Tables 3 and 4 reveal p-values which are significant at the 5% statistical level. These confirm that there exists at least one co-integrating equation among the variables, thus making them fit for the regression models.

Parameter Estimates of Regression Models

Impact of Covid-19 on the money market

From Table 5, the t-statistics (t = -1.7210) of the estimate of the co-efficient of COVID-19 (Cvd) is not statistically significant at the 5% level (p = 0.088). The co-efficient is negative (β1 = - 0.71) suggesting an inverse relationship between COVID-19 and OBBR. This implies that a percentage change in cases of covid-19 results in 71percent change in interbank money market rate. Similarly, the t-statistics (t = -2.2648) of the estimate of the lockdown status (LDS) is significant at the 5% level (p = 0.025). This is a control variable and as expected, the number of covid-19 cases affect the decision on the lockdown status by the Nigerian government.

Further results from Table 5 show an R-squared value of 0.0542, suggesting that 5.42percent of the variations in the dependent variable (OBBR) are explained by the independent variables (Cvd & LDS). The F-statistics (F =3.35 & p = 0.038) is statistically significant at the 5% level, suggesting that the independent variables jointly and significantly explain the variations in the model. The estimated Durbin-Watson statistics (0.97) is less than 2, indicating the absence of autocorrelation in the time series data.

Looking at the result from Table 6, the t-statistics (t = -8.5616) of the estimate of the co- efficient of COVID-19 (Cvd) is statistically significant at the 5% level (p = 0.00). The co-efficient is negative (β1 = -0.09) suggesting an inverse relationship between COVID-19 and ASIV. This implies that a percentage change in the number of cases of covid-19 produces 9percent change in the All- Share Index value of the capital market.