Capital Market Response to Monetary Policy Shocks: Evidence from Nigeria

Cordelia Onyinyechi Omodero

Abstract

This study appraises the capital market response to monetary policy surprises in Nigeria. Due to the critical role of the capital market in the international economy and finance, it becomes very imperative to determine the effect of monetary policy announcements on its operations. This study uses data that cover a period from 2000 to 2018 to analyze the effect of the monetary policy shocks on the capital market outputs in Nigeria. The data are collected on capital market capitalization, money supply, interest rate and exchange rate while applying the ordinary least squares (OLS) multiple regression technique for data analysis. The multiple regression result provides evidence that money supply has a remarkable positive impact on capital market capitalization while the interest rate exerts a significant negative effect on the capital market output. The study further reveals that the exchange rate has an insignificant positive effect on the capital market performance. Based on these findings, the study suggests initial test running of all monetary policy modifications by the monetary authority in the country before the full adoption of such policy changes. The study also recommends that the CBN should endeavor to encourage credit accessibility and investment in securities by reducing the interest rate and exchange rate fluctuations.