Sensitivity of Stock Returns Volatility and Money Market Rates:  Insight from Nigeria

Stephen Friday Aleke; Paul C. Obidike; Frankline C. S. A. Okeke; Sandra Ijeoma Echeonwu; Kalu O. Emineke

doi:10.54045/talaa.v2i1.385

Authors

Stephen Friday Aleke Alex Ekwueme Federal University Ndufu-Alike, Nigeria https://orcid.org/0000-0001-5756-3021
Paul C. Obidike Alex Ekwueme Federal University Ndufu-Alike, Nigeria
Frankline C. S. A. Okeke Alex Ekwueme Federal University Ndufu-Alike, Nigeria https://orcid.org/0000-0002-1781-337X
Sandra Ijeoma Echeonwu Alex Ekwueme Federal University Ndufu-Alike, Nigeria
Kalu O. Emineke University of Eswatini, Eswatini https://orcid.org/0000-0001-5756-3021

DOI:

https://doi.org/10.54045/talaa.v2i1.385

Keywords:

Money Market Rates Indicators, Stock market Returns, Volatility, GARCH 1-1 Model

Abstract

The study focused on how money market factors affected the stock returnfluctuations in the Nigerian setting. The study specifically looked at the impact of Treasury bill rates and monetary policy rates on the return fluctuations in Nigeria from2002 - 2016 over the study period. Financial econometrics study was performed using descriptive statistics, unit root test, heteroscedasticity, autocorrelation, GARCH (1.1), and GARCH-X (1.1) models. The series' stationarity was confirmed using the PP test and the Equally Augmented Dickey-Fuller (ADF) test. Additionally, a Benchmark GARCH (1.1) model was estimated to study the volatility. A diagnostic test was run using the Ljung-Box Q-Statistics to determine the robustness of the calculated GARCH model. The overall finding indicated that there was significant volatility clustering that was still present in the Nigerian exchange group, suggesting that it would take some time for the market's reaction to volatility shocks from the prior period to be completely eliminated. The study also discovered that changes in treasury bill rates and monetary policy rates significantly reduce the volatility of returns on the stock in Nigeria, supporting the idea that there is an inverse link between the value of money and the value of capital markets.

References

Aliyu, Shehu U R. 2011. “Reactions of Stock Market to Monetary Policy Shocks during the Global Financial Crisis : The Nigerian Case.” CBN Journal of Applied Statistics 3 (1): 17–41.

Becker, Fernando Gertum, Michelle Cleary, R M Team, Helge Holtermann, Disclaimer The, National Agenda, Political Science, et al. 2015. Syria Studies 7 (1): 37–72. https://www.researchgate.net/publication/269107473_What_is_governance/link/548173090cf22525dcb61443/download%0A http://www.econ.upf.edu/~reynal/Civilwars_12December2010.pdf%0Ahttps://think-asia.org/handle/11540/8282%0A https://www.jstor.org/stable/41857625.

Bhat, KU, and SZA Shah. 2015. “Empirical Investigation of the Relationship between Exchange Rate Movements and Stock Market Volatility in the Context of Pakistan.” Pakistan Business Review 814 (1): 744–58. https://pbr.iobm.edu.pk/wp-content/uploads/2016/01/1-Kalim-Ullah-Bhat.pdf.

Bhowmik, Debesh. 2013. “Stock Market Volatility: An Evaluation.” International Journal of Scientific and Research Publications 3 (10): 1–18.

Bisson, R., Seetonah, B., Bhattu-Babajee, R., Hopy-Ramdhany, N., & Seetah, K (2016).

Blitz, David, Eric Falkenstein, and Pim Van Vliet. 2014. “Explanations for the Volatility Effect: An Overview Based on the CAPM Assumptions.” Journal of Portfolio Management 40 (3): 61–76. https://doi.org/10.3905/jpm.2014.40.3.061.

Central Bank of Nigeria (2006). Monetary Credit Foreign Trade and Exchange Policy Guidelines for 2000 Fiscal Year, Monetary Policy Circular, No.34.

Central Bank of Nigeria, (1992). Monetary policy department. Central bank of Nigeria statistical bulletin for social issues. Retrieved from http:/www.centralbank.org/.com Accessed on 23/6/2018.

Chali, Gudata Abara, and Zerhun Asefa Ashe. 2016. “A Study on Determinants of Loan Repayment Performance: The Case of Sidama Micro Financing Institution, Sidama Zone, SNNPR, Ethiopia.” European Academic Research III (10): 10637–50.

Chen, N. F., Roll, R. & Ross, S. (1986). Economic forces and the stock market. Journal of Business 59(3): 83-403.

Chowdhury, S., Mollik, A. & Akhter, M. (2006). Does predicted macroeconomic volatility influence stock market volatility? Evidence from Bangladesh capital market. Department of finance and banking working paper, 1-15.

Crowder, William J. 2006. “The Interaction of Monetary Policy and Stock Returns.” Journal of Financial Research 29 (4): 523–35. https://doi.org/10.1111/j.1475-6803.2006.00192.x.

Decker, Alexander, and Alexander Decker. n.d. “11 . Stock Market Volatility and Macroeconomic Variables Volatility in Nigeria.”

Dickey, D. A. and Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of American statistical association, 74:427-431.

Emenike, K. O. (2010). Modelling stock returns volatility in Nigeria using GARCH models. African journal of management and administration, 3(1):8-15.

Emenike, K. O. (2015). Volatility transmission between money and stock markets: evidence from developing financial market. Journal of economic and financial sciences, 9(1): 251-262.

Emenike, K. O & Odili, O (2014). Stock Market Return Volatility and Macroeconomic Variables in Nigeria. International Journal of Empirical Finance 2(2): 75-82.

Engle, R. F and Rangel, J. G (2005). The Spline GARCH Model for Unconditional Volatility and its Global Macroeconomics Causes”. NYU Working Papers No SC-CEFE-04-05.

Engle, R. F. (2003). Risk and volatility: Econometric models and financial practice. Noble lecture (December 8), Salomon Centre New York.

Fasanya, Ismail O., and Mary A. Akinde. 2019. “Volatility Transmission in the Nigerian Financial Market.” Journal of Finance and Data Science 5 (2): 99–115. https://doi.org/10.1016/j.jfds.2019.01.003.

Fifield, S. G. M., Power, D. M. and Sinclair, C. D. (2002). Macroeconomic factor and share returns: an analysis using emerging market data. International journal of finance and economics, 33(1):51-62.

Ghosh, Saurabh, and Indranil Bhattacharyya. 2009. “Spread, Volatility and Monetary Policy: Empirical Evidence from the Indian Overnight Money Market.” Macroeconomics and Finance in Emerging Market Economies 2 (2): 257–77. https://doi.org/10.1080/17520840903076622.

Granger, C. W. J. & Newbold, P. (1974). Spurious regressions in econometrics. Journal of econometrics, 2:111-120.

Hafner, C.M. & Herwartz, (2006). A Lagrange multiplier test for causality in variance”. Economics letters, 93, 137-141.

Hameed, Irfan. 2011. “Impact of Monetary Policy on GDP,” 1348–62.

Hojat, S. (2015). The impact of monetary policy on stock market. Ph.D thesis of Walden University, Minneapolis, USA Retrieved from http//:scholarworks.walden.edu/ dissertation. Accessed on 12/9/2017.

Kamal, A.L.M (2018). The impact of Treasury bill rate and interest rate on the stock market returns in Egypt, Journal of Development and Sustainability, 7 (2): 604—619.

Karolyi, G. A. (2001). Why stock return volatility really matters? Institutional investors’ journal series, 614:1-16.

Khan, Muhammad Kamran, Jian Zhou Teng, and Muhammad Imran Khan. 2019. “Asymmetric Impact of Oil Prices on Stock Returns in Shanghai Stock Exchange: Evidence from Asymmetric ARDL Model.” PLoS ONE 14 (6): 1–14. https://doi.org/10.1371/journal.pone.0218289.

Kirui, E., Wawire, N. W. & Onono, P. O. (2014) Macroeconomic Variables, Volatility and Stock market Returns: A case of Nairobi Securities Exchange, Kenya. International Journal of Economics and Finance; 6(8): 215-228.

Kuwornu, John K.M. 2012. “Effect of Macroeconomic Variables on the Ghanaian Stock Market Returns: A Co-Integration Analysis.” Agris On-Line Papers in Economics and Informatics 4 (2): 15–26.

Lee, T. H. (1994). Spread and volatility in spot and forward exchange rates. Journal of international money and finance, 13:375-383.

Linter, J. (1965). The valuation risk basset and the selection of risky investments in stock portfolios and capital budgets. Review of economics and statistics, 47(10):13-37.

Marozva, Godfrey. 2020. “The Effects of Monetary Policy on Stock Market Returns and Volatility: Evidence from South Africa.” Academy of Accounting and Financial Studies Journal 24 (3): 2635.

Monetary Policy Impact on Stock Return: Evidence form Growing Stock Markets. Theoretical Economics Letters, 6, 1186-1195.

Mukherjee, T. & Naka, A. (1995). Dynamic relations between macroeconomic variables and the Japanese stock market: an application of a vector error correction model. Journal of financial research 18(2):223-237.

Phillips, P. C. B. and Perron, P. (1988). Testing for unit roots in a time series regression. Biometrika, 75:335-346.

Pilbmean, K. (1992). International Finance Macmillan, LondonNgozi, V. 2014. “Testing Volatility in Nigeria Stock Market Using GARCH Models.” CBN Journal of Applied Statistics 5 (2): 65–93.

Okechukwu, Izunobi Anthony, Nzotta Samuel Mbadike, Ugwuanyim Geoffrey, and Benedict Anayochukwu Ozurumba. 2019. “Effects of Exchange Rate, Interest Rate, and Inflation on Stock Market Returns Volatility in Nigeria.” International Journal of Management Science and Business Administration 5 (6): 38–47. https://doi.org/10.18775/ijmsba.1849-5664-5419.2014.56.1005.

OLOWE, RUFUS AYODEJI. 2011. “Inter-Bank Call Rate Volatility and the Global Financial Crisis: The Nigerian Case.” International Journal of Economics and Finance 3 (1): 283–96. https://doi.org/10.5539/ijef.v3n1p283.

Otieno, Donald A., Rose W. Ngugi, and Nelson H. W. Wawire. 2017. “Effects of Interest Rate on Stock Market Returns in Kenya.” International Journal of Economics and Finance 9 (8): 40. https://doi.org/10.5539/ijef.v9n8p40.

Owidi, Ogega Haggai, and Freshia Mugo-Waweru. 2016. “Analysis of Asymmetric and Persistence in Stock Return Volatility in the Nairobi Securities Exchange Market Phases.” Journal of Finance and Economics 4 (3): 63–73. https://doi.org/10.12691/jfe-4-3-1.

Patel. 2019. “No Title No Title No Title,” 9–25.

Pathan, Rubina, and Mansur Masih. 2015. “Relationship between Macroeconomic Variables and Stock Market Index : Evidence from India.” Munich Personal RePEc Archive 2 (63302): 94–108.

Pproach, Ardl A. 2019. “Ardl A,” no. 2: 98–116.

Saeed, Shah, Hassan Chowdhury, and M Selim Akhter. 2006. “Does Predicted Macroeconomic Volatility Influence Stock Market Volatility ? Evidence from the Bangladesh Capital Market Does Predicted Macroeconomic Volatility Influence Stock Market Volatility ? Evidence from the Bangladesh Capital Market.” Banking, no. January 2006.

Setiawan, Satria Aji. 2020. “Does Macroeconomic Condition Matter for Stock Market? Evidence of Indonesia Stock Market Performance for 21 Years.” The Indonesian Journal of Development Planning IV (1): 27–39.

Thampanya, Natthinee, Junjie Wu, Muhammad Ali Nasir, and Jia Liu. 2020. “Fundamental and Behavioural Determinants of Stock Return Volatility in ASEAN-5 Countries.” Journal of International Financial Markets, Institutions and Money 65. https://doi.org/10.1016/j.intfin.2020.101193.

Thorbecke, Willem, and Tarik Alami. 1994. “The Effect of Changes in the Federal Funds Rate Target on Stock Prices in the 1970s.” Journal of Economics and Business 46 (1): 13–19. https://doi.org/10.1016/0148-6195(94)90018-3.

Türkyılmaz, Serpil, and Mesut Balıbey. 2014. “The Relationships among Interest Rate, Exchange Rate and Stock Price: A BEKK - MGARCH Approach.” International Journal of Economics, Finance and Management Sciences 1 (3): 166. https://doi.org/10.11648/j.ijefm.20130103.16.

Uddin, Md Sahab, Md Sarwar Hossain, Abdullah Al Mamun, Devesh Tewari, Md Asaduzzaman, Md Siddiqul Islam, and Mohamed M. Abdel-Daim. 2018. “Phytochemical Analysis and Antioxidant Profile of Methanolic Extract of Seed, Pulp and Peel of Baccaurea Ramiflora Lour.” Asian Pacific Journal of Tropical Medicine 11 (7): 443–50. https://doi.org/10.4103/1995-7645.237189.

Under, Equilibrium, and Conditions Of. 1964. “Of FINANCE” XIX: 425–42.

Worlanyo, Johnson, Johnson Worlanyo Ahiadorme, Emmanuel Sonyo, Godwin Ahiase, and Corresponding Author. 2019. “Munich Personal RePEc Archive Time Series Analysis of Interest Rates Volatility and Stock Returns in Ghana Time Series Analysis of Interest Rates Volatility and Stock Returns in Ghana,” no. 94292.

Xu, J. (2007). Interest Rate Uncertainty and Stock Market Volatility. (M.Sc ) Dissertation, Singapore Management University.

Yaya, OlaOluwa, and Olanrewaju Shittu. 2010. “On the Impact of Inflation and Exchange Rate on Conditional Stock Market Volatility: A Re-Assessment.” American Journal of Scientific and Industrial Research 1 (2): 115–17. https://doi.org/10.5251/ajsir.2010.1.2.115.117.