Aliyu, Shehu Usman Rano (2011): Reactions of stock market to monetary policy shocks during the global financial crisis: the Nigerian case.
Download (266kB) | Preview
This paper seeks to assess the reactions of Nigeria’s stock market to monetary policy innovations during the period of global financial crisis on the basis of monthly data over the period January, 2007 to August, 2011. In particular, stock market return was regressed against major monetary policy instruments; money stock (M1, and M2) and monetary policy rate (MPR). The theoretical basis for the paper stems from the works of new classical macroeconomics, rational expectation hypothesis. Lucas (1972) postulates that the unanticipated and not anticipated monetary shock influences real economic activity. Using the GARCH by developed Engle and Bollerslev (1986) and EGARCH by Nelson (1991) methodologies, the paper empirically assessed the impact monetary policy innovations exerts on stock returns in the Nigeria’s Stock Exchange (NSE) market during the period of the crisis. Results from the empirical analysis revealed that the unaticipated component of policy innovations on M2 and MPR exerts distabilizing effect on NSE’s returns, whereas the anticipated component does not. This lends support to the REH argument for the Nigerian stock market. The pqper strongly recommends realistic and timely policy pronouncements by the MPC to achieve stability in the market.
|Item Type:||MPRA Paper|
|Original Title:||Reactions of stock market to monetary policy shocks during the global financial crisis: the Nigerian case|
|Keywords:||Monetary Policy, GARCH, EGARCH, Rational Expectation Hypothesis|
|Subjects:||E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
G - Financial Economics > G0 - General > G01 - Financial Crises
|Depositing User:||Usman Rano Aliyu|
|Date Deposited:||26. Dec 2011 21:05|
|Last Modified:||12. Feb 2013 11:48|
Abdul Qayyum and Anwar, S. (2011). Impact of Monetary Policy on the Volatility of Stock Market in Pakistan, Online at http://mpra.ub.uni-muenchen.de/31188/, MPRA Paper No. 31188., posted 03. June 2011 / 09:31
Aliyu, S. U. R. (2009) “Stock Prices and Exchange Rate Interactions in Nigeria: A Maiden Intra-Global Financial Crisis Investigation”, The Icfai University Journal of Financial Economics, Vol. VII, Nos. 3 & 4, pp. 5 – 17.
Aliyu, S. U. R. (2011) “Does Inflation has an Impact on Stock Returns and Volatility? Evidence from Nigeria and Ghana” International Conference Paper, www.csae.ox.ac.uk/conferences/2011-EdiA/papers/054-Aliyu.pdf
Ash, J.C.K., J.Z. Easaw, S.M. Heravi and D.J. Smyth (2002). Are Hodrick-Prescott Forecast Rational? Empirical Economics, 27, 631-643.
Beltratti, A. and C. Morana (2006) Breaks and Persistency: Macroeconomic Causes of Volatility, Journal of Econometrics, 131, 151 – 177.
Bernanke, Ben, and Mark Gertler, (2000). Monetary Policy and Asset Price Volatility, NBER Working Paper, Number 7559.
Bernanke, B. and Kuttner, N. (2005) What Explains the Stock Market’s Reaction to the Federal Reserve Policy? The Journal of Finance, Vol. LX, pp. 1221-1257.
Bjornland, H.C. and K. (Leitemo) (2009) Identifying the Interdependence between US Monetary Policy and the Stock Market, Journal of Monetary Economics, 56(2), 275-282.
Blanchard, O. J. (1981). Output, the Stock Market and Interest Rates, American Economic Review, 71, 132-143.
Bollerslev, T. (1986) Generalized Autoregressive Conditional Heteroscedasticity, Journal of Econometrics, (31).
Booth, J., and Booth, L., (1997). Economic Factors, Monetary Policy, and Expected Returns on Stocks and Bonds. Federal Reserve Bank of San Francisco 2.
Campbell, J. (1991). A Variance Decomposition for Stock Returns. The Economic Journal, 101. pp. 157–179.
Campbell, John Y., and Ludger Hentschel, (1992) “No News is Good News: An Asymmetric Model of Changing Volatility in Stock Returns,” Journal of Financial Economics, 31, 281–318.
Cassola, N. and Morana, C. (2004) Monetary Policy and Stock Market in the Euro Area, Journal of Policy Modeling (26), pp. 387 – 399.
Chami R., Cosimano T., F. and C. Fullerkamp (1999). “The Stock Market Channel of Monetary Policy”, IMF Working Paper, No. 22.
Chiang, T.C and J.J. Chiang (1996). Dynamic Aanalysis of Stock Return Volatility in an Integrated International Capital Market. Review of Quatitative Finance and Accounting. 6,5-17
Christiano, L. J., M. Eichenbaum and C. L. Evans, (1999). Monetary policy shocks: What have we learned and to what end? in Taylor, J.B. and Woodford, M. (eds.), Handbook of Macroeconomics 1A, chap. 2, 65-148.
Engle, R. F. (1982) Autoregressive Conditional Heteroskedasticity and Estimates of the Variance of UK Inflation, Econometrica, Vol. 50, 987-1008.
Fair, Ray C. (2002) Events that Shook the Market. Journal of Business, (75), pp. 713 – 731.
Fama, E., and French, K., (1989). Business Conditions and Expected Returns on Stocks and Bonds. Journal of Financial Economics 25, 23-49.
Farka, M. (2008). The Volatility Impact of Policy Actions on Stocks and Treasuries: Analysis from Intraday Data, California State University, Fullerton, Working Paper.
Friedrich Hayek (1933 in German). "On 'Neutral Money'," in F. A. Hayek. Money, Capital, and Fluctuations: Early Essays, edited by Roy McCloughry, Chicago, University of Chicago Press, 1984.
Gertler, M., and Gilchrist, S., (1993). The Role of Credit Market Imperfections in the Monetary Transmission Mechanism: Arguments and Evidence. Scandinavian Journal of Economics, 95, 43-64.
Hodrick, R., and E. Prescott, (1997) “Postwar U.S. Business Cycles: An Empirical Investigation,” Journal of Money, Credit and Banking, Vol. 29 (February), pp. 1–16.
Jensen, G., and Johnson, R., (1995). Discount Rate Changes and Security Returns in the US, 1962-1991. Journal of Banking and Finance, 19, 79-95.
Jensen, G., Mercer, J., and Johnson, R., (1996). Business Conditions, Monetary Policy, and Expected Security Returns. Journal of Financial Economics, 40, 213-237.
Juat-Hong, Tan (2009). Stock Market Reactions to Monetary Policy Changes, Research in Finance: GARCH, its Applications and EMH. Eds. Wei-Chong and Sin-Chun, Universiti Putra, Malaysia, pp.19-26.
Kearns, J. And P. Manners (2005). The Impact of Monetary Policy on the Exchange Rate: A Study Using Intraday Data. Reserve Bank of Australia Resaerch Discussion Paper. 2005-02
Kearney, C. and K. Daly (1998). The Causes of Stock Market Volatility In Australia, Applied Financial Economics, 8, 597-605.
Kim, Y. and Shin, J. (2000) “Interactions among China related stocks”, Asia-Pacific Financial Markets, 7:97-115.
Kuttner. K. (2001). Monetary Policy Surprises and Interest Rates: Evidence from the Fed Funds Futures Market. Journal of Monetary Economics. 47 (3). pp. 523–544.
Kwiatkowski, Dennis, Peter C. B. Phillips, Peter Schmidt, and Yoncheol Shin, 1992, “Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We that Economic Time Series have a Unit Root?” Journal of Econometrics, vol. 54 (October-December), 159-178.
Ljung, G. and G. Box (1979). “On a Measure of Lack of Fit in Time Series Models,” Biometrika, 66, 265–270.
Lobo, B. (2000). Asymmetric Effects of Interest Changes on Stock Prices, The Financial Review, 35 (3), 125-144.
Lobo, B. (2002). Interest Rate Surprises and Stock Prices, The Financial Review, 37 (1), 125-144.
Lucas, Robert, E. (1972). Expectation and the Neutrality of Money, Journal of Economic Theory, 4, 103-124.
Mishkin, F.(2009). Is Monetary Policy Effective During Financial Crises? NBER Working Paper. 14678
Muth, John F. (1961) "Rational Expectations and the Theory of Price Movements" Econometrica, 21, 315-335.
Nelson, Daniel B. (1991) Conditional Heteroscedasticity in Asset Returns: A New Approach, Econometrica, Vol. 59, 347-370
Reinhart, V., & Simin, T. (1997). The Market Reaction to Federal Reserve Policy Action from 1989 to 1992. Journal of Economics and Business, 49, 149-168.
Roberto Rigobon & Brian Sack, (2001). "Measuring the reaction of monetary policy to the stock market," Finance and Economics Discussion Series 2001-14, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
Rigobon, R., & Sack B. (2003). Measuring the Reaction of Monetary Policy to the Stock Market. Quarterly Journal of Economics, 118, 639-669.
Rigobon, R., & Sack, B. (2004). The Impact of Monetary Policy on Asset Prices. Journal of Monetary Economics, 51(8), 1553-1575.
Svensson, L.E.O., (1986). Sticky Goods Prices, Flexible Asset Prices, Monopolistic Competition and Monetary Policy, Review of Economic Studies, 53(3), 385-405.
Thorbecke, W., (1997). On Stock Market Returns and Monetary Policy. Journal of Finance, 52, 635-654.
Waud, R., 1970. Public Interpretation of Federal Reserve Discount Rate Changes: Evidence on the ‘Announcement Effect’. Econometrica, 38, 231-250.
Zivot, E. (2008). Practical Issues in the Analysis of Univariate GARCH models, Handbook of Financial Time Series.