STOCK MARKET RETURN REACTIONS TO MONETARY POLICY SHOCKS: EMPIRICAL EVIDENCE FROM NIGERIA

By

1 Babatunde Wasiu Adeoye & 2 Samson Isumaila Ojo

Department of Economics, University of Lagos, Akoka, Lagos

Corresponding author:badeoye2010@yahoo.com; +2348093655210

Abstract

This study examined the nexus between monetary policy shocks and stock return reactions in Nigeria. It investigated the extent to which rate
of money supply affects returns on the stock market. Autoregressive Distributed Lag (ARDL) regression estimation and granger
causality technique were used for the analysis. The regression results indicate that changes in the money supply, inflation rate, government
expenditure and financial deepening exert significant effect on stock market performance in Nigeria. Granger causality results also reveal
that interest rate, inflation rate, government expenditure and financial deepening all granger cause stock market returns in Nigeria.
The causality is unidirectional, as it runs from interest rate to stock market returns, inflation rate to stock market returns, government expenditure to stock market returns, and financial deepening to stock
market returns. The estimation also showed that money supply only exerts significance positive effect on stock market returns in the short run period, but
does not granger cause stock market performance in the long run. This means that any shocks that arise from monetary policy change, influence
stock market returns in Nigeria. The study concluded with a recommendation that, the CBN should review its monetary policy frameworks in its entirety and make sure they are consistent so as to
mitigate the extent to which they transmit volatility on stock market returns in Nigeria.

Key Words:Monetary Policy Shocks, Stock returns, Stock market performance.
JEL Classi?cation: E52, G11,G28, O16