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THE EFFECT OF RISK VARIABLES ON CAPITAL MARKET OPERATIONS IN NIGERIA
1.1 OVERVIEW OF THE STUDY
Overtime the capital market has been identified as an ingredient for rapidly increasing the pace of economic growth and development of any nation. In the light of the above ascertain, Donwa and Odia, (2010) noted that the capital market has been identified as an institution that contributes to the socio-economic growth and development of emerging and developed economies. This is made possible through some of the vital roles such as channeling resources, promoting reforms to modernize the financial sectors, financial intermediation ,capacity to link deficit to the surplus sector of the economy and veritable tool in the mobilization and allocation of savings among competitive uses which are critical to the growth and efficiency of the economy. It helps to channel capital on long term resource to firms with relatively high and increasing productivity thus enhancing economic expansion and growth. In another view, Ekundayo, (2002) argues that a nation required a lot of local and foreign investments to attain sustainable economic growth and development. The capital market provides a means through which this is made possible. However the pancity of long term capital has been the greatest predicament to economic development in most African countries including Nigeria.
Relatedly, Osaze (2000) sees the capital market as the driver of any economy to growth and development because it is essential for the long – term growth capital formation. It is crucial in the mobilization of savings and channeling of such savings to profitable self – liquidating investment. Also the Nigerian capital market provides the necessary lubricant that keeps turning the wheel of the economy it does not only provides the funds required for investment but also efficiently allocates these funds to projects of best returns to fund owners. This allocative function is critical in determining the overall growth rate of the economy. The functioning of the capital market affects liquidity acquisition of information about firms, risks diversification, savings mobilization and corporate control (Ekundayo, 2002).
To this end, researchers have recognized the power of market forces and private initiatives in economic development. They have also increasingly recognized that African countries need to embed private initiatives in a framework of public actions. Such public actions have led to the restructuring of the economy, towards market oriented economy and intervention that favour diversification of production. In other words capital market forces and private entrepreneurship are considered to be the engine that drive the economy while government would perform the strategic and co-ordinating role in the production area. However a prominent feature of capital market activities have been that of credit risk (Uzori, 2012). In relation credit risk need to become more forward looking. Yet corporate risk in particular has focused on the use of historic data. This may require a change to the approach that has been used for many years.
Risk reward can help your firm by:
- Developing your credit policies and procedures
- Designing new approaches to the assessment of credit risks.
- Implement effective stress testing and scenario modeling
- Implement forward looking portfolio measures (Dennis, 2010).
In line with the above submissions, it is therefore necessary that a study be conducted to establish the relationship between risk special references to the Nigerian capital market. This therefore establish and showcase risk management and portfolio analysis activities of quoted companies in the Nigerian capital market.