Derivatives finance and performance of Nigeria exchange group

This research paper will examine the derivatives finance on performance of Nigerian Exchange Group (NGX), specifically financial derivatives, and money market derivatives. The research is inspired by the increase in the utility of derivative instruments in new markets and how it is likely to affect the stock market performance. The secondary data was taken the form of historical data of NGX market capitalization and derivative transactions in 30 years (19862024). The quantitative econometric methods involved in the analysis of the secondary data on derivative activities and NGX performance indicators included the utilisation of the Augmented Dickey fuller test to ascertain unit roots, Johansen co-integration estimates, and Full modified Ordinary Least Squares. ADF test findings revealed that variables were combined on the order one level and the Johansen one identified long-run relationship presence in derivatives and NGX market capitalization. FMOLS results indicated that financial derivatives were statistically significant and had a negative influence on capitalization of the market which indicated speculative misuse. On the other hand, money market derivatives made a favorable and notable impact, which underscores their contribution towards helping in maintaining liquidity and capitalization growth. Diagnostic tests also confirmed the strength of the model by not showing serial correlation. The results revealsthe significance of regulation frameworks, investor education, and stabilisation of macroeconomic fundamentals to ensure the maximum execution of derivatives in Nigeria. This research contributes to body of literature on development of a financial market, as the empirical evidence presented is based on an African frontier market, in which derivatives are still underused. This study concludes that derivatives are potent instruments of improving market capitalisation when well controlled and put into proper use.