Stock market reaction to selected macroeconomic variables in the Nigerian economy

Terfa Williams Abraham

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Monetary Policy and Economic Impact Financial Markets and Investment Strategies Market Dynamics and Volatility

Abstract

This study examines the relationship between the stock market and selected macroeconomic variables in Nigeria. The all share index was used as a proxy for the stock market while inflation, interest and exchange rates were the macroeconomic variables selected. Employing error correction model, it was found that a significant negative short run relationship exists between the stock market and the minimum rediscounting rate (MRR) implying that, a decrease in the MRR, would improve the performance of the Nigerian stock market. It was also found that exchange rate stability in the long run, improves the performance of the stock market. Though the results for Treasury bill and inflation rates were not significant, the results suggests that they were negatively related to the stock market in the short run thus, achieving low inflation rate and keeping the TBR low could improve the performance of the Nigerian stock market. Specifically, the study concludes that, by achieving stable exchange rates and altering the MRR, monetary policy would be effective in improving the performance of the Nigerian stock market.

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References

1987Co-Integration and Error Correction: Representation, Estimation, and Testing 1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1988Statistical analysis of cointegration vectors 1990MAXIMUM LIKELIHOOD ESTIMATION AND INFERENCE ON COINTEGRATION — WITH APPLICATIONS TO THE DEMAND FOR MONEY 1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]2005Relationship between Macroeconomic Variables and Stock Market Indices: Cointegration Evidence from Stock Exchange of Singapore's All-S Sector Indices 1997Fundamental determinants of national equity market returns: A perspective on conditional asset pricing

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