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Reactions of stock market to monetary policy shocks during the global financial crisis: the Nigerian case

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  • Aliyu, Shehu Usman Rano

Abstract

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.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35581.

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Date of creation: 24 Nov 2011
Date of revision: 28 Dec 2011
Handle: RePEc:pra:mprapa:35581

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Keywords: Monetary Policy; GARCH; EGARCH; Rational Expectation Hypothesis;

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References

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Cited by:
  1. Aliyu, Shehu Usman Rano, 2012. "Islamic banking and finance in Nigeria: issues, challenges and opportunities," MPRA Paper 42573, University Library of Munich, Germany, revised 05 Nov 2012.

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