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Interest Rate Shocks And Stock Market Volatility In Nigeria (1985-2014)

Author

Listed:
  • R.A. Omotunde (M.Sc.)

    (Department of Economics, Faculty of Social Science, University of Lagos, Akoka, Lagos)

  • Isaac Chii Nwaogwugwu (PhD)

    (Department of Economics, Faculty of Social Science, University of Lagos, Akoka, Lagos)

  • N. I. Nwokoma (Professor)

    (Department of Economics, Faculty of Social Science, University of Lagos, Akoka, Lagos)

Abstract

The potency of monetary policy tools in determining the direction of asset prices in Nigeria is becoming more evident as monetary policy can determine short term stock market behaviour. The study seeks to analyse the extent to which interest rate shocks result in Stock Market Volatility. Consequently, the impact of interest rate as well as other macroeconomic variables on the dynamics of stock market was analysed while also showing how volatility of stock market, given changes in interest rate, can be forecasted. We adopted the ARCH/GARCH methodology of estimation but employed a univariate model that modelled stock market volatility (NSEASI) as a function of INT, INF, EXR and M2. All the variables were found to be integrated of order one and also co-integrated using the 2- stage Engle Granger Co-integration test. The study found out that interest rate and other monetary policy pronouncements influence only short term behaviour of stock market in Nigeria. Results reveal that there have been limited shocks in interest rate within the horizon and that macroeconomic variables are not really accountable for stock market volatility. It was suggested that the monetary policy authority may consider a much more indirect approach (through the fixed income) of influencing the stock market.

Suggested Citation

  • R.A. Omotunde (M.Sc.) & Isaac Chii Nwaogwugwu (PhD) & N. I. Nwokoma (Professor), 2016. "Interest Rate Shocks And Stock Market Volatility In Nigeria (1985-2014)," West African Journal of Monetary and Economic Integration, West African Monetary Institute, vol. 16(2), pages 44-72, December.
    • Handle: RePEc:wam:journl:v:16:y:2016:i:2:p:44-72
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    More about this item

    Keywords

    Monetary Policy; Interest Rate; Stock Market; Volatility; ARCH/GARCH;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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