News

  15 Jun 2020

PROFESSOR OF FINANCE PROFERS PANACEA FOR BAILING OUT FINANCIAL BUBBLE AFFLICTED ECONOMY

“In an Economy afflicted by Financial bubbles, the Government, through its Monetary Authority, the Central Bank, can embark on Monetary squeeze, encourage entrepreneurs and bankers to sell their bubble asset for International liquidity to finance investment projects. Bankers should also lend liberally to enhance growth of domestic credits, to accelerate investment, employment and output in the economy”.

A Professor of Finance, Abia State University, Professor Godwin C. Okpara, who disclosed this, while delivering the *22nd Inaugural Lecture of the University, on the Topic: “Speculative Financial Bubbles, Volatility and the Nigerian Economy”*, further stated that the absence of Market efficiency, due to Informational inefficiency, causes high volatility persistence and could lead to Financial bubbles.

According to him, the Financial market is divided into two- the Money Market and Capital Market.
*Money Market* is a market for raising short term funds or debt instruments which usually have maturity of one year or less. These include, Treasury bills, Treasury Certificates and Central Bank Certificates.
The major Institutions found in the Money Market are the Central Bank and Commercial Banks.
*Capital Market* on the other hand, is a market which provides long term finance for capital development. The major Institutions involved in the Capital Market in Nigeria are the Securities and Exchange Commission (SEC), as a regulatory Institution, the Nigerian Stock Exchange etc. 
One of the benefits of the Stock Market to Government and Corporate entities is the provision of long term, non-debt Financial Capital for development.

On the concept of *”Rational Speculative Bubbles” or “Price Bubbles”*, Professor Okpara defined it “as the asset price movement that is unexplained by the fundamentals”. This he described with the *”Greater Fool Theory”*, “which portrays Bubbles as driven by the behaviour of Perennial Optimistic Market participants *(called the fools)*, who buy overvalued assets in anticipation of selling it to other speculators *(the greater fools)* at a much higher price. The Bubbles continue, so long as greater fools who can pay up for the overvalued assets remain in the market.

According to him, in real life situation, Intrinsic Values are difficult to observe, therefore, Investors and Policy makers may not realize the level of Speculative Trading in the market until the Bubble bursts. He attributed causes of Financial Bubbles to include: presence or absence of uncertainty, speculation, inflation etc.

On *Asymmetric Volatility Phenomenon*, the Lecturer defined it as a Market dynamic which shows that there are higher Market Volatility levels in Market downswings, than in Market upswings. It implies that Volatility tends to increase in response to bad news and decrease in respect to good news.

*On Nigerian experience in Global Financial Crisis*, he stated that devastating effect of Bubbles is not a new phenomenon, as emerging market economies have been plagued by episodes of Bubble-like dynamics.

The Lecturer therefore recommends as follows:

🔸 That the Nigerian Stock Exchange should ensure timely, speedy, reliable and appropriate dissemination of Company specific information to Investors and Market operators.

🔸 That better persuasive methods through Fiscal Incentives, such as two tiers corporate tax system or “tax holiday” in favour of quoted Companies should be introduced.

🔸 That Market barriers and stringent listing requirements should be palliated more to make membership of the Stock Exchange more lucrative to both Small and Medium- scale Industries.

🔸 That Government should take urgent steps to address the issue of social unrest and insecurity that is devastating the National Economy.

🔸 That Financial Researchers should be set aside for diagnostic assessment and detection of signals of Financial Instability in the country.

🔸 As a preventive measure, indiscriminate Monetary Policy actions that will constitute impediments on the growth of Financial system should be avoided.

Please:
Keep safe
Play safe.

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