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Interest Rate Risk of Stock Prices in Nigeria

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  • Raphael I. Udegbunam
  • Hassan E. Oaikhenan

Abstract

The article empirically examines the response of stock prices in the Nigerian Stock Market to interest rate risk, using the Duration and Convexity model. A simple non-linear stock price model that incorporates measure of interest rate duration and convexity and a vector containing a battery of other control variables is specified and estimated using annual secondary data that covered the 1981–2006 sample period. The empirical results largely corroborate the hypothesis of interest rate sensitivity of stock prices in the Nigerian Stock Market. Specifically, we find both measures of interest rate duration and convexity to exert strong but opposite effects on stock prices in Nigeria. The empirical evidence shows that the net effect of interest rate changes on stock prices is negative, an indication that stock prices fall with increases in stock risk. The results provide empirical support for the duration and convexity hypothesis of the existence of a non-linear relationship between interest rate risk and stock prices in Nigeria. JEL Classification : G1, G12

Suggested Citation

  • Raphael I. Udegbunam & Hassan E. Oaikhenan, 2012. "Interest Rate Risk of Stock Prices in Nigeria," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 11(1), pages 93-113, April.
  • Handle: RePEc:sae:emffin:v:11:y:2012:i:1:p:93-113
    DOI: 10.1177/097265271101100104
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    References listed on IDEAS

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    1. John B. Carlson & Kevin H. Sargent, 1997. "The recent ascent of stock prices: can it be explained by earnings growth or other fundamentals?," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-12.
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    More about this item

    Keywords

    Interest rate risk; stock prices; duration and convexity;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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