Impact Of Global Financial Crisis On Crude Oil Prices, Stock Prices And Inflation Rates In Nigeria

CHAPTER TWO
LITERATURE REVIEW
INTRODUCTION
This chapter is a review of the literature encountered during the course of this study. It aims to set out the foundation upon which the author builds and addresses the lack of specific literature on financial crisis by building bridges between the literature that is available in the field of inflation, stock market and the literature concerning crude oil prices.
The chapter also evaluates the current information on the state of the global financial crisis.
This thesis, will be exploring global financial crisis as related to crude oil prices, inflation rates and stocks in Nigeria through the laws of global financial crisis.
This had led me to a literature review which can be delineated into a number of sections:-
-Stock Market in Nigeria/ Financial Crises
-Inflation/Crude oil prices
Okobia, et al (1998), defined literature review as a systematic and critical examination of what other writers or researchers have written on a particular topic that is related to one’s area of study. Gay (1981) saw literature review as a systematic identification, location and analysis of documents containing information related to the research problem.
The contents of a good literature review should cover the following issues amongst others (Yomere et al, 1999)
i) Theories    that    throw    some    light    on    the    subject    being investigated;
ii) The different aspects of the topic that have been studied so far;
iii) The different ways in which the relevant concepts have been operationalised;
iv) A critique of the existing studies.
In this chapter, an attempt will be made to examine literature that would be of utmost relevance to this research work. In doing this, I will be limited to the following core areas as earlier highlighted in our statement of problems and scope of the research work in chapter one. Previous research works carried out by various authors and experts will be examined as they relate to the topic of this research work.
2.3 Stock Market in Nigeria/ Financial Crises
Financial markets worldwide reflect ongoing deleveraging pressures amidst a deepening economic downturn.  In spite  of extensive policies, the global financial system remains under intense stress. Moreover, economic experts have noted  that  the  global  economic  crisis  has clearly manifested in the Nigerian economy, with the nation facing an underlying economic crisis characterized by structural imbalances, market distortions, poor infrastructure and weak public institutions [Iroegbu (2009)].
This observation was made at a recent National Policy Symposium in Abuja with the theme, “Making Sense of the Global Economic Crisis: Taking Lessons and Avoiding the  Wrong  Lessons  for  Sustainable Growth to 2020”.
According to the Executive Director of African Institute For Applied Economics(AIAE),Eric Eboh (2009) the transmission channel to the Nigerian economy is generally two-fold, namely, the contagion effects and second-round effects. Through the contagion effect, the Nigerian Stock Market (NSE) lost large volumes of foreign portfolio investment. On the other hand, the second-round effects manifested through the sharp drop in the international price of crude oil, the losses of foreign direct investment, trade credit, remittances and other financial flows including foreign aid.
Stock market crashes have an important role to play in  promoting banking and financial crises through the network effects on adverse selection and moral hazard problem as described by (Gertler, (1988).
The proximate cause of the current financial turbulence is attributed to the sub-prime mortgage sector in the USA. At a fundamental level,
however, the crisis could be ascribed to the persistence of large global imbalances, which, in turn, were the outcome of long periods of excessively loose monetary policy in the major advanced economies during the early part of this decade [Mohan, R.( 2006), Taylor,(2009)].
Global imbalances have been manifested through a substantial increase in the current account deficit of the US mirrored by the substantial surplus in Asia, West Africa, particularly in Nigeria, one of the oil exporting countries in the West Africa (Lane, (2009)). These imbalances in the current account are often seen as the consequence of the relative inflexibility of the currency regimes in China and some other Emerging Market Economies (EMEs). According to Portes (2009), global macroeconomic imbalances were the major underlying cause of the crisis. These saving-investment imbalances and consequent huge cross-border financial flows put great stress on the financial intermediation process. The global imbalances interacted with the flaws in financial markets and instruments to generate the specific features of the crisis. Such a view, however, offers only a partial analysis of the recent global economic environment. The role of monetary policy in the major advanced economies, particularly that in the United States, over the same time period needs to be analyzed for a more balanced analysis.
It is interesting to note that the various stress tests conducted by the major banks and financial institutions prior to the crisis period had
revealed that banks were  well-capitalized  to  deal  with  any  shocks. Such stress tests, as it appears, were based on the very benign data of the period of the Great Moderation and did not properly capture and reflect the reality (Haldane, (2009)).
There is also little systematic evidence that financial opening raises welfare indirectly by promoting collateral reforms of economic institutions  or  policies.  At  the  same  time,  opening  the  financial account does appear to raise the frequency and severity of  economic crises (Obstfeld, 2009)). The evidence appears to favour a hierarchy of capital flows. While the liberalization of equity flows seems to enhance growth prospects, the evidence that the liberalization of debt flows is beneficial to the EMEs is ambiguous (Henry, (2007)); Committee  on Global Financial System (2009).