Effect of economic recession on the relationship between Macro-economic variables and investment performance Of Nigerian banking sector

Abstract

The relationship between macroeconomic variables and stock market performance may have been established but the relationship between macroeconomic variables and investment performance is extremely rare and this relationship becomes more fluid when the economy is experiencing an economic recession. Given the high volatility of the market, it is important that
investment performance of the sector should be evaluated by putting into consideration the macroeconomic indicators that influence the financial market and how the relationship between these factors, as well as investment performance, is impacted by recession in order to maximize investors' return and reduce their risk. This among others provides a cause for investigating the Effect of Economic Recession on the Relationship between Macro-economic Variables and Investment Performance of Listed Commercial Banks in Nigeria for a period of 13years from 1st of January 2010 to 31st of December 2022. This study employed a census sampling approach and utilized secondary sources of data collected from Nigerian Stock Exchange (NGX) website for banking index (NSE Banking index) and All-share index as well as CBN website for the macroeconomic variables. Risk-adjusted measures like Sharpe ratio, Sortino measure, Jensen’s Alpha, Modigliani measure and Treynor’s ratio were adopted,
however, after a series of analysis, the study finds Jensen’s alpha ratio with a better lag for measuring investment performance while exchange rate, inflation rate, interest rate and money supply were used as proxies for macroeconomic variable and Economic recession was measured as a dummy variable. In order to achieve the objectives of this study, Auto Regressive Distributive Lag (ARDL) model analysis was performed. The study finds out that the first lag of exchange rate was positively significant while the first lag of Money supply was negatively significant on the investment performance of listed commercial banks in Nigeria. However, Inflation Rate, Interest Rate and Economic Recession were statistically insignificant on the investment performance of listed commercial banks in Nigeria. It is therefore, recommended that, the Federal Government of Nigeria and the Central bank of Nigeria should employ a policy that will improve on the value of the naira currency against the dollar in order
to encourage local institutions to invest more on the sector than the foreign investors. The study also recommends that monetary policies should be put in place by the Central Bank to mop-up excess liquidity in the economy in order to maximize the return on the investment in the sector.