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Testing for the Causality between Interest Rate and Stock Market Performance in Nigeria

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  • Ditimi Amassoma
  • O. Adeleke

Abstract

In this paper, the causal relationship between interest rate and stock market performance is investigated using a VECM-based Granger causality test on annual time series data from 1975 to 2016. The rationale for this study emanates from the unpredictable behaviour of the Nigerian stock exchange from the outset of the global financial economic crisis from 2007/8 till date couple to the increasingly high key policy rates like interest rate by the CBN that has refused to drop. The results reveal that the interest rate exerted a negative but statistically insignificant relation to stock market performance in the long run. In addition, Granger causality test result noted that there is no causality between interest rate and stock market performance. Thereby, advocating that other macroeconomic factors predict stock market activities better than the interest rate as suggested by the bi-directional causality between exchange rate and All Share index in the result. The implication is that a proper portfolio diversification should be ensued; via a fair exchange rate policy can stimulate the activities of the stock market and vice-versa. Consequently, the paper recommends that the government should do justice to her monetary policy by way of trimming down its interest rate in such a way that will encourage both local and foreign investors to borrow funds at a cheaper rate to invest in the stock market which in turn boost economic well being of the country.

Suggested Citation

  • Ditimi Amassoma & O. Adeleke, 2018. "Testing for the Causality between Interest Rate and Stock Market Performance in Nigeria," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 109-124.
    • Handle: RePEc:bas:econst:y:2018:i:3:p:109-124
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    More about this item

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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