Reactions of stock market to monetary policy shocks during the global financial crisis: the Nigerian case
MPRA Paper from University Library of Munich, Germany
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.
Keywords: Monetary Policy; GARCH; EGARCH; Rational Expectation Hypothesis (search for similar items in EconPapers)
JEL-codes: E44 E52 G01 (search for similar items in EconPapers)
Date: 2011-11-24, Revised 2011-12-28
New Economics Papers: this item is included in nep-afr, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:35581
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