Modelling asymetric response of stock market volatility to monetary policy: Empirical evidence from Nigeria

This paper analyses how stock market volatility responds to monetary policy during bull and bear market phases in the period from the first quarter of 1990Q1 to the fourth quarter of 2023Q4 using MS-VAR model. It investigated stock market fluctuation in both the bull and bear periods using the composite index of the Nigerian Stock Exchange (NSE), the All Share Index and the most appropriate monetary policy indicator, the interest rates. The monetary policy shocks were found to positively respond to the stock market volatility with relatively small volatility in the first regime. For the second regime, the graph shows that an increase in monetary policy shock positively affects volatility at the onset before afterwards turning the move into the negative side of volatility. This policy advice is that the Central Bank of Nigeria (CBN) should be extra cautious when setting and enforcing fiscal measures. Furthermore, due to the erratic performance by Nigeria stock market, the government and the relevant authorities should avoid interfering with the market during these situations as such interferences may trigger further instabilities to the market, because such measures merely slow the causes down, and do not bring lasting solutions.