IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/112934.html
   My bibliography  Save this paper

The Effect Of Monetary Policy On Stock Market Performance In Nigeria

Author

Listed:
  • Osuagwu, Eze

Abstract

This paper investigates the impact of monetary policy variables on the performance of the stock market in Nigeria using quarterly data for twenty four years (1984:1 – 2007:4). A linear combination of stock market index and monetary policy variables is estimated using ordinary least squares; co-integration and error-correction specification. It is observed that stock market performance is strongly determined by broad money supply, exchange rates and consumer price index in the short and long-run. Hence, the liquidity, exchange rate and price level channel of monetary policy transmission is supported by evidence as determinants of stock price movements in Nigeria. On the other hand, minimum rediscount rate and treasury bill rates show mixed results, they were unable to demonstrate significant relationship to changes in stock market index, though their coefficients follow expectations. However, on a parsimonious examination of the variables, it is observed that a significant relationship exists if used discriminately. Hence, for the interest rate channel of monetary policy transmission to effect changes in stock market index either minimum rediscount rate or treasury bills rate should be applied at a time and not simultaneously.

Suggested Citation

  • Osuagwu, Eze, 2009. "The Effect Of Monetary Policy On Stock Market Performance In Nigeria," MPRA Paper 112934, University Library of Munich, Germany, revised Jul 2009.
    • Handle: RePEc:pra:mprapa:112934
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/112934/1/MPRA_paper_112934.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Xing-Qiu Zhao, 1999. "Stock prices, inflation and output: evidence from China," Applied Economics Letters, Taylor & Francis Journals, vol. 6(8), pages 509-511.
    2. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
    3. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-565, September.
    4. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    5. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
    6. Kim, Ki-ho, 2003. "Dollar exchange rate and stock price: evidence from multivariate cointegration and error correction model," Review of Financial Economics, Elsevier, vol. 12(3), pages 301-313.
    7. Nelson, Charles R, 1976. "Inflation and Rates of Return on Common Stocks," Journal of Finance, American Finance Association, vol. 31(2), pages 471-483, May.
    8. Kaul, Gautam, 1987. "Stock returns and inflation : The role of the monetary sector," Journal of Financial Economics, Elsevier, vol. 18(2), pages 253-276, June.
    9. Ki‐ho Kim, 2003. "Dollar exchange rate and stock price: evidence from multivariate cointegration and error correction model," Review of Financial Economics, John Wiley & Sons, vol. 12(3), pages 301-313.
    10. Bodie, Zvi, 1976. "Common Stocks as a Hedge against Inflation," Journal of Finance, American Finance Association, vol. 31(2), pages 459-470, May.
    11. Geske, Robert & Roll, Richard, 1983. "The Fiscal and Monetary Linkage between Stock Returns and Inflation," Journal of Finance, American Finance Association, vol. 38(1), pages 1-33, March.
    12. Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, vol. 16(1), pages 121-130, May.
    13. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    14. Tarun K. Mukherjee & Atsuyuki Naka, 1995. "Dynamic Relations Between Macroeconomic Variables And The Japanese Stock Market: An Application Of A Vector Error Correction Model," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 18(2), pages 223-237, June.
    15. Bofinger, Peter, 2001. "Monetary Policy: Goals, Institutions, Strategies, and Instruments," OUP Catalogue, Oxford University Press, number 9780199248568.
    16. Waud, Roger N, 1970. "Public Interpretation of Federal Reserve Discount Rate Changes: Evidence on the 'Announcement Effect'," Econometrica, Econometric Society, vol. 38(2), pages 231-250, March.
    17. Mukherjee, Tarun K & Naka, Atsuyuki, 1995. "Dynamic Relations between Macroeconomic Variables and the Japanese Stock Market: An Application of a Vector Error Correction Model," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 18(2), pages 223-237, Summer.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pallegedara, Asankha, 2012. "Dynamic relationships between stock market performance and short term interest rate Empirical evidence from Sri Lanka," MPRA Paper 40773, University Library of Munich, Germany.
    2. GIMBA John Toro & VINCENT Harrison S. & OYEDOKUN Godwin Emmanuel, 2020. "Effect Of Monetary Policy On The Performance Of Listed Deposit Money Banks In Nigeria," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 482-503, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Justin .C. Alugbuo & Ekwugha Juliet Chika, 2020. "Monetary Policy and Stock Market Performance: Evidence from Nigeria Stock Exchange Market," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 4(6), pages 556-568, June.
    2. Sellin, Peter, 1998. "Monetary Policy and the Stock Market: Theory and Empirical Evidence," Working Paper Series 72, Sveriges Riksbank (Central Bank of Sweden).
    3. Díaz, Antonio & Jareño, Francisco, 2009. "Explanatory factors of the inflation news impact on stock returns by sector: The Spanish case," Research in International Business and Finance, Elsevier, vol. 23(3), pages 349-368, September.
    4. Konrad Farrugia & Janice Duca & Peter J. Baldacchino & Simon Grima, 2021. "The Relationship between Inflation and Stock Returns in a Small Island State: An Analysis," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 11(2), pages 51-78.
    5. Somayeh Madadpour & Mohsen Asgari, 2019. "The puzzling relationship between stocks return and inflation: a review article," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 66(2), pages 115-145, June.
    6. Hosseini, Seyed Mehdi & Ahmad, Zamri & Lai, Yew Wah, 2011. "The Role of Macroeconomic Variables on Stock Market Index in China and India," MPRA Paper 112215, University Library of Munich, Germany.
    7. Choudhry, Taufiq, 2001. "Inflation and rates of return on stocks: evidence from high inflation countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 11(1), pages 75-96, March.
    8. Širůček, Martin, 2015. "Kauzalní vztah peněžní nabídky a amerického akciového trhu [Money supply and US stock market causality]," MPRA Paper 66357, University Library of Munich, Germany, revised 30 Aug 2015.
    9. Rudra P. PRADHAN & Mak B. ARVIN & Bele SAMADHAN & Shilpa TANEJA, 2013. "The Impact of Stock Market Development on Inflation and Economic Growth of 16 Asian Countries: A Panel VAR Approach," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 13(1), pages 203-218.
    10. Gupta, Rakesh & Yuan, Tian & Roca, Eduardo, 2016. "Linkages between the ADR market and home country macroeconomic fundamentals: Evidence in the context of the BRICs," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 230-239.
    11. Martin Hoesli & Colin Lizieri & Bryan MacGregor, 2008. "The Inflation Hedging Characteristics of US and UK Investments: A Multi-Factor Error Correction Approach," The Journal of Real Estate Finance and Economics, Springer, vol. 36(2), pages 183-206, February.
    12. Pierre Siklos & Ben Kwok, 1999. "Stock returns and inflation: a new test of competing hypotheses," Applied Financial Economics, Taylor & Francis Journals, vol. 9(6), pages 567-581.
    13. Tania Morris & Jules Comeau, 2020. "Portfolio creation using artificial neural networks and classification probabilities: a Canadian study," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 34(2), pages 133-163, June.
    14. Zoë Venter, 2020. "The Interaction Between Conventional Monetary Policy and Financial Stability: Chile, Colombia, Japan, Portugal and the UK," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 62(3), pages 521-554, September.
    15. Solnik, Bruno & Solnik, Vincent, 1997. "A multi-country test of the Fisher model for stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 7(4), pages 289-301, December.
    16. Aliyu, Shehu Usman Rano, 2020. "What have we learnt from modelling stock returns in Nigeria: Higgledy-piggledy?," MPRA Paper 110382, University Library of Munich, Germany, revised 06 Jun 2021.
    17. Suhaibu, Iddrisu & Harvey, Simon K. & Amidu, Mohammed, 2017. "The impact of monetary policy on stock market performance: Evidence from twelve (12) African countries," Research in International Business and Finance, Elsevier, vol. 42(C), pages 1372-1382.
    18. Ram Chandra Bhattarai & Nayan Krishna Joshi, 2009. "Dynamic Relationship among the Stock Market and the Macroeconomic Factors," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 10(2), pages 451-469, July.
    19. Pesce, Gabriela & Pedroni, Florencia Verónica, 2021. "Inflación y rendimientos en mercados emergentes: el caso de Argentina || Inflation and returns in emerging markets: the case of Argentina," Revista de Métodos Cuantitativos para la Economía y la Empresa = Journal of Quantitative Methods for Economics and Business Administration, Universidad Pablo de Olavide, Department of Quantitative Methods for Economics and Business Administration, vol. 32(1), pages 341-375, December.
    20. Geraldine Ryan, 2006. "Irish stock returns and inflation: a long span perspective," Applied Financial Economics, Taylor & Francis Journals, vol. 16(9), pages 699-706.

    More about this item

    Keywords

    monetary policy; stock market index; co-integration and errorcorrection model.;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:112934. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.