IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

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

  • Aliyu, Shehu Usman Rano

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
File Function: original version
Download Restriction: no

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

in new window

Date of creation: 24 Nov 2011
Date of revision: 28 Dec 2011
Handle: RePEc:pra:mprapa:35581
Contact details of provider: Postal: Schackstr. 4, D-80539 Munich, Germany
Phone: +49-(0)89-2180-2219
Fax: +49-(0)89-2180-3900
Web page:

More information through EDIRC

References listed on IDEAS
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.:

as in new window
  1. Ben S. Bernanke & Kenneth N. Kuttner, 2004. "What Explains the Stock Market's Reaction to Federal Reserve Policy?," NBER Working Papers 10402, National Bureau of Economic Research, Inc.
  2. Ray C. Fair, 2002. "Events That Shook the Market," The Journal of Business, University of Chicago Press, vol. 75(4), pages 713-732, October.
  3. J. Z. Easaw & S. M. Heravi & J. C. K. Ash & D. J. Smyth, 2002. "Are Hodrick-Prescott `forecasts' rational?," Empirical Economics, Springer, vol. 27(4), pages 631-643.
  4. Hilde C. Bjørnland & Kai Leitemo, 2008. "Identifying the interdependence between US monetary policy and the stock market," Working Paper 2008/04, Norges Bank.
  5. Gertler, Mark & Gilchrist, Simon, 1993. " The Role of Credit Market Imperfections in the Monetary Transmission Mechanism: Arguments and Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(1), pages 43-64.
  6. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  7. Thorbecke, Willem, 1997. " On Stock Market Returns and Monetary Policy," Journal of Finance, American Finance Association, vol. 52(2), pages 635-54, June.
  8. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
  9. Beltratti, A. & Morana, C., 2006. "Breaks and persistency: macroeconomic causes of stock market volatility," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 151-177.
  10. Jensen, Gerald R. & Mercer, Jeffrey M. & Johnson, Robert R., 1996. "Business conditions, monetary policy, and expected security returns," Journal of Financial Economics, Elsevier, vol. 40(2), pages 213-237, February.
  11. Lobo, Bento J, 2000. "Asymmetric Effects of Interest Rate Changes on Stock Prices," The Financial Review, Eastern Finance Association, vol. 35(3), pages 125-43, August.
  12. repec:oup:qjecon:v:118:y:2003:i:2:p:639-669 is not listed on IDEAS
  13. Bento J. Lobo, 2002. "Interest Rate Surprises and Stock Prices," The Financial Review, Eastern Finance Association, vol. 37(1), pages 73-91, 02.
  14. Qayyum, Abdul & Anwar, Saba, 2011. "Impact of Monetary Policy on the Volatility of Stock Market in Pakistan," MPRA Paper 31188, University Library of Munich, Germany.
  15. Campbell, John, 1991. "A Variance Decomposition for Stock Returns," Scholarly Articles 3207695, Harvard University Department of Economics.
  16. Hentschel, Ludger & Campbell, John, 1992. "No News is Good News: An Asymmetric Model of Changing Volatility in Stock Returns," Scholarly Articles 3220232, Harvard University Department of Economics.
  17. Cassola, Nuno & Morana, Claudio, 2002. "Monetary policy and the stock market in the euro area," Working Paper Series 0119, European Central Bank.
  18. Aliyu, Shehu Usman Rano, 2009. "Stock Prices and Exchange Rate Interactions in Nigeria: An Intra-Global Financial Crisis Maiden Investigation," MPRA Paper 13283, University Library of Munich, Germany, revised 09 Feb 2009.
  19. Shehu Usman Rano Aliyu, 2012. "Does inflation have an impact on stock returns and volatility? Evidence from Nigeria and Ghana," Applied Financial Economics, Taylor & Francis Journals, vol. 22(6), pages 427-435, March.
  20. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
  21. Jonathan Kearns & Phil Manners, 2005. "The Impact of Monetary Policy on the Exchange Rate: A Study Using Intraday Data," RBA Research Discussion Papers rdp2005-02, Reserve Bank of Australia.
  22. Chiang, Thomas C & Chiang, Jeannette Jin, 1996. " Dynamic Analysis of Stock Return Volatility in an Integrated International Capital Market," Review of Quantitative Finance and Accounting, Springer, vol. 6(1), pages 5-17, January.
  23. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
  24. Waud, Roger N, 1970. "Public Interpretation of Federal Reserve Discount Rate Changes: Evidence on the 'Announcement Effect'," Econometrica, Econometric Society, vol. 38(2), pages 231-50, March.
  25. Rigobon, Roberto & Sack, Brian, 2004. "The impact of monetary policy on asset prices," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1553-1575, November.
  26. Ben S. Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 77-128.
  27. repec:oup:restud:v:53:y:1986:i:3:p:385-405 is not listed on IDEAS
  28. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
  29. Reinhart, Vincent & Simin, Timothy, 1997. "The market reaction to federal reserve policy action from 1989 to 1992," Journal of Economics and Business, Elsevier, vol. 49(2), pages 149-168.
  30. Jensen, Gerald R. & Johnson, Robert R., 1995. "Discount rate changes and security returns in the U.S., 1962-1991," Journal of Banking & Finance, Elsevier, vol. 19(1), pages 79-95, April.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:35581. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.