Efficiency of the Nigerian Stock Market with Respect to Pure Contemporary Monetary Policy Instruments: A Dynamic Weighted LS Approach

The study seeks to investigate empirically the relationship between the monetary policy instruments used by the Central Bank of Nigeria and stock market performance measured by the growth of market capitalization in the Nigerian Stock Exchange Market. We employed time series data that spanned from 1980-2013. This period was considered due to the liberalization of the financial sector. Utilizing the method of DWLS Model, the study found out that monetary policy instruments such as Monetary Policy Rate, Treasury Bills, Direct Credit Control and Broad Money Supply, have long and short-run high impacts on stock market performance. This implies that, those variables have great effect (positively or negatively) on the Nigerian stock market. Our findings also revealed that variations in market capitalization in the short run were also caused by the change in cash reserve ratio, liquidity ratio and exchange rate. The study suggests that, government through the monetary authority should be cautious enough to avoid discretionary policies that might hike the rate of interest, otherwise the flow of fund to the market will be derailed. The study concluded by giving policy recommendations to policymakers to understand the peculiarities of their own markets when formulating and implementing monetary policy.