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INTEREST RATE SHOCKS AND STOCK MARKET VOLATILITY IN NIGERIA (1985-2014)

R.A. Omotunde (M.Sc.) (), Isaac Chii Nwaogwugwu (PhD) and N. I. Nwokoma (Professor)
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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

West African Journal of Monetary and Economic Integration, 2016, vol. 16, issue 2, 44-72

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.

Keywords: Monetary Policy; Interest Rate; Stock Market; Volatility; ARCH/GARCH (search for similar items in EconPapers)
JEL-codes: C22 E32 E44 E52 G12 (search for similar items in EconPapers)
Date: 2016
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