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Return-Volatility Interactions in the Nigerian Stock Market

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  • MARGARET N. OKOLI

    ()
    (Department of Financial Management, School of Management Technology, Federal University of Technology, Owerri, Imo State, Nigeria)

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    Abstract

    The study employed the GARCH (1, 1) and VAR models to ascertain the relationship between volatilities in the monetary policy variables and volatilities in the stock market returns in Nigeria between 1980 and 2010.The study showed that only exchange rate policy variable have an influence on the stock market volatility with a negative coefficient but statistically significant indicating that higher volatility in the exchange rate dampens stock market activities. This means that an increase in exchange volatility will lead to a fall in stock market volatility. Additionally, result showed that M1granger causes very significantly M2 and vice versa. Implicitly, it shows that there is “bi-directional causality” or a “bi-directional feedback” between M1 andM2.What this implies is that stabilizing interest rate will reduce the volatility in the stock market. The study also observed that there is no effect of international factor and influence on the stock market returns implying that international volatilities is not transmitted across national stock markets in Nigeria. Finally, there is the presence of volatility shocks. The study therefore suggested that government policy should focus on exchange rate to stabilize the stock market. Investors are also advised to consider the nature of volatility in exchange rate before making investment decisions.

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    Bibliographic Info

    Article provided by Asian Economic and Social Society in its journal Asian Economic and Financial Review.

    Volume (Year): 2 (2012)
    Issue (Month): 2 (June)
    Pages: 389-399

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    Handle: RePEc:asi:aeafrj:2012:p:389-399

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    Keywords: Monetary policy volatility; stock market volatility; GARCH (1; 1); VAR;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Officer, R R, 1973. "The Variability of the Market Factor of the New York Stock Exchange," The Journal of Business, University of Chicago Press, vol. 46(3), pages 434-53, July.
    2. Eva Liljeblom & Marianne Stenius, 1997. "Macroeconomic volatility and stock market volatility: empirical evidence on Finnish data," Applied Financial Economics, Taylor & Francis Journals, vol. 7(4), pages 419-426.
    3. Mansor H. Ibrahim and Wan Sulaiman Wan Yusoff, 2001. "Macroeconomic Variables, Exchange Rate And Stock Price: A Malaysian Perspective," IIUM Journal of Economics and Management, IIUM Journal of Economis and Management, vol. 9(2), pages 141-164, December.
    4. James M. Poterba & Lawrence H. Summers, 1984. "The Persistence of Volatility and Stock Market Fluctuations," Working papers 353, Massachusetts Institute of Technology (MIT), Department of Economics.
    5. repec:cup:cbooks:9780521694681 is not listed on IDEAS
    6. Willem Thorbecke, 1998. "On Stock Market Returns and Monetary Policy," Macroeconomics 9812009, EconWPA.
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    Cited by:
    1. Haruna Issahaku & Yazidu Uztarz & Paul Bata Domanban, 2013. "Macroeconomic Variables and Stock Market Returns in Ghana: Any Causal Link?," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 3(8), pages 1044-1062, August.

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