Financial Innovation In The Nigerian Stock Market: A Test of Casual Relationships Between Global Depository Receipts (GDRS) and Underlying Stocks

Abstract

The modern competive world requires a lot of creativity, which warrants series of innovative activities by regulators, investors and firms in order to survive. Investment through Global Depository Receipts (GDRs) is one of such financial innovation tools that could be deployed to attract investors and enable survival in the modern competitive world. GDRs and their underlying shares should serve as perfect substitutes, which could in turn eliminate arbitrage opportunities. Most studies in emerging markets are concentrated in India most of which provide evidence of international integration of the stock market. This study, therefore, seeks to examine the direction of causality between GDRs and underlying shares in the Nigeria Stock Market, determine whether there is price transmission between GDRs and the underlying shares, and examine whether there is market integration between the London Stock Exchange and the Nigerian Stock market. The GDRs and underlying shares data were analysed using Pearson Correlation coefficient, unit root to determine the existence of shock, cointegration test to examine the long run relationship while Granger causality was used to examine the direction of causality between GDRs and their underlying shares. The results from the study indicates that GDRs and the underlying shares of these companies move in similar trend both in the short run and the long run. The results of the Granger causality on the other hand, showed that none of the GDRs and their underlying shares have a bidirectional causality. However, unidirectional relationship exists between two GDRs and their underlying shares. The results further confirm that the Nigerian stock market is not fully integrated. It is therefore recommended that relevant regulatory agencies like the Security and Exchance Commision (SEC) should create awareness on the availabilty of global depository receipts and how they can be accessed in the capital market, and the State should initiate policies that could help towards hedging against foreign exchange risks and associated management by encouraging investors to invest more on GDRs