THE EFFECT OF MONETARY POLICY ON STOCK MARKET PERFORMANCE IN NIGERIA.

Osuagwu, Eze (2009): THE EFFECT OF MONETARY POLICY ON STOCK MARKET PERFORMANCE IN NIGERIA. Published in: Nigerian Journal of Securities and Finance , Vol. 14, No. 2 (September 2009)

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: monetary policy, stock market index, co-integration and errorcorrection model.
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers

References

Adebiyi, M. A. (2005), “Capital Market Performance and the Nigerian Economic Growth.” In Issues in Money, Finance and Economic Management in Nigeria – Essays in Honour of Professor Obasanmi Olakanpo, Edited By O. O. Fakiyesi and Olasupo Akano; University of Lagos Press.

Bernanke, B.S. and Blinders, A.S. (1992) “The Federal Funds Rate and the channels of Monetary Transmission” American Economic Review, 82, 901-902.

________ and Gertler, M. (1995), “Inside the Black Box: The Credit Channel of Monetary Policy Transmission,” Journal of Economic Perspectives, 9 (4); 22-48.

Benderly, Jason, and Burton Zwick, (1985), “Inflation, Real Balances, Output and Real Stock Returns,” American Economic Review 75 (December): 1115-1123.

Bodie, Zvi (1976), “Common Stocks as a Hedge Against Inflation,” Journal of Finance 31 (May): 459 – 470.

Bofinger, P, (2001) “Monetary Policy: Goals, Institutions and Instruments,” New York, Oxford University Press.

Brealey, Richard, and Stewart Myers (1984), Principles of Corporate Finance (New York: McGraw – Hill).

Charemza, W. W., and D. F. Deadman, (1997); New Directions in Econometric Practice: 2nd Edition, Edward Elgar Publishing Inc. Norhampton, MA .USA.

Davidson, R. and J.G. Mackinnon (1993), Estimation and Inference in Econometrics, New York: Oxford University Press, P. 722

Dickey, D. A. and W. A. Fuller, (1979) “Distribution of the Estimators for Autoregressive Time Series with a Unit Root.” Journal of American Statistical Association, 74, 1979, 427-431.

Dickey, D., and W. Fuller. (1981). “Likelihood Ratio Tests for Autoregressive Time Series with a Unit Root.” Econometrica, 49, pp. 1057-1072.

Durham, J. Benson, (2003), “Should Equity Investors „Fight the Central Bank‟?: The Effect of Monetary Policy on Stock Market Returns,” Financial Analysts Journal, Forthcoming.

Ely, David P. and Kenneth J. Robinson (1993), “The Stock Market and Inflation: A synthesis of the Theory and Evidence. In The Financial Institutions and Markets Reader 2nd Ed. Edited by Robert Kolb, Kolb Publishing Coy. Miami Florida.

Engle, R.F. and C. W. J. Granger (1987), “Cointergration and Error Correction: Representation, Estimation and Testing.” Econometrica, 55 (2): 251-276.

Fama, Eugene F. (1981), “Stock Returns, Real Activity, Inflation and Money,” American Economic Review 71 (September): 545-565

_____ and G. William Schwert, (1977), “Asset Returns and Inflation,” Journal of Financial Economics 5 (November): 115-146.

Friedman, Milton (1956), “The Quantity Theory of Money – A Restatement,” Reprinted from Studies in the Quantity Theory of Money, University of Chicago Press.

Geske, Robert, and Richard Roll (1983), “The Fiscal and Monetary Linkage between Stock Returns and Inflation,” Journal of Finance 38 (March): 1 – 33.

Granger, C. (1981), “Some Properties of Time Series Data and Their Use in Econometric Model Specification.” Journal of Econometrics, 16, pp.. 121-130.

Granger, C. and P. Newbold (1974), “Spurious Regressions in Econometrics.” Journal of Econometrics, 2, pp. 111-120.

Hill, R. C., W. E. Griffiths and G. G. Judge (2001); Undergraduate Econometrics – 2nd Edition. New York: John Wiley & Sons Inc. pp.84-149.

Ibrahim, Mansor H. (1999), “Macroeconomic Variables and Stock Prices in Malaysia: An Empirical Analysis,” Asian Economic Journal, 13 (2) 219 – 231.

_______ (2003), “Macroeconomic Forces and Capital Market Integration: A VAR Analysis for Malaysia,” Journal of the Asian Pacific Economy, 8 (1), 19-40.

Iyoha, Milton A. (2004) Macroeconomics: Theory and Policy; Mindex Publishing; Revised Edition.

Kashyap, A. (1997) “The Lending Channel and European Monetary Union” in S. Collignon (ed.) European Monetary Policy, London; Pinter: 42-71.

Kaul, Gatam (1987), “Stock Returns and Inflation: The Role of the Monetary Sector,” Journal of Financial Economics 18 (June): 253 – 276.

Kim, K (2003) “Dollar Exchange Rate and Stock Price: Evidence from tMultivariate Cointegration and Error Correction Model.” Review of Financial Economics 12, 301-313.

Komolafe, O. S., (1996); “Cointegration Theory: Technique and Application.” In Macroeconomic Policy Analysis, Tools Technique and Application to Nigeria. Edited by Obadan, M. I. and Iyoha M. A. Ibadan: NCEMA, pp. 301-320.

Mills, T. (1990), Time Series Techniques for Economists. New York: Cambridge University Press.

Nelson, Charles R. (1976) “Inflation and Rates of Return on Common Stocks,” Journal of Finance 31, No.2, (May): 471-483.

Nnanna, O.J. (2001), Monetary Policy Framework in Africa-The Nigerian Experience. Paper Presented at the 2001 South African Reserve Bank Conference.

Mbutor, O. Mbutor (2007), “The Lending Channel of Monetary Policy Transmission in Nigeria; Vector Autoregressive (VAR) Verification,” Central Bank of Nigeria; Economic and Financial Review Vol.45/1 March.

Mishkin, Frederic (2007), The Economics of Money, Banking and Financial Markets. Eight Edition. Pearson Addison Wesley. New York.

Mukherjee, Tarun K. and Naka Atsuyuki (1995), “Dynamic Relations Between Macroeconomic Variables and the Japanese Stock Market: An Application of Vector Error Correction Model,” The Journal of Financial Research, XVIII. (2), 223-237.

Onyido, Benji C. (1994), “The Nigerian Financial Markets” Bullion Publication of the Central Bank of Nigeria, Vol. 18, No. 2. Report of the Presidential Task Force on Market Mechanisms (1988) (Washington, D. C.: Government Printing Office, January).

Tsoukalas, Dimitrios (2003), “Macroeconomic Factors and Stock Prices in the Emerging Cypriot Equity Market”, Managerial Finance 29(4), pp.87-92

Uchendu (1996), “The Transmission of Monetary Policy in Nigeria”. Central Bank of Nigeria: Economic and Financial Review, 34(2), 606 – 625.

Udegbunam, Ralph and P. O. Eriki (2001), “Inflation and Stock Price Behavior: Evidence from Nigerian Stock Market,” Journal of Financial Management & Analysis, XX (14) (1), 1-10.

Waud, R., (1970), “Public Interpretation of Federal Reserve Discount Rate Changes: Evidence on the „Announcement Effect‟” Econometrica, Vol. 38, 231-250.

Zhao, Xing-Qiu (1999), “Stock prices, inflation and output: Evidence from China,” Applied Economics Letters, 6 (8), 509-511.