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

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1 Journal of Appled Fnance & Bankng, vol. 6, no. 4, 2016, ISSN: (prn verson), (onlne) Scenpress Ld, 2016 Effcency of he Ngeran Sock Marke wh Respec o Pure Conemporary Moneary Polcy Insrumens: A Dynamc Weghed LS Approach Ernes Smeon Odor 1 and Isaac Chn. Nwaogwugwu 2 Absrac The sudy seeks o nvesgae emprcally he relaonshp beween he moneary polcy nsrumens used by he Cenral Bank of Ngera and sock marke performance measured by he growh of marke capalzaon n he Ngeran Sock Exchange Marke. We employed me seres daa ha spanned from Ths perod was consdered due o he lberalzaon of he fnancal secor. Ulzng he mehod of DWLS Model, he sudy found ou ha moneary polcy nsrumens such as Moneary Polcy Rae, Treasury Blls, Drec Cred Conrol and Broad Money Supply, have long and shor-run hgh mpacs on sock marke performance. Ths mples ha, hose varables have grea effec (posvely or negavely) on he Ngeran sock marke. Our fndngs also revealed ha varaons n marke capalzaon n he shor run were also caused by he change n cash reserve rao, lqudy rao and exchange rae. The sudy suggess ha, governmen hrough he moneary auhory should be cauous enough o avod dscreonary polces ha mgh hke he rae of neres, oherwse he flow of fund o he marke wll be deraled. The sudy concluded by gvng polcy recommendaons o polcymakers o undersand he peculares of her own markes when formulang and mplemenng moneary polcy. JEL classfcaon numbers: E51, G24, C32 Keywords: Ngeran Sock Marke, Moneary Insrumens, Dynamc Weghed LS 1 Correspondng Auhor, Senor Lecurer, Deparmen of Economcs, Faculy of Socal Scences Unversy of Lagos, Akoka Lagos, Ngera. 2 Senor Lecurer, Deparmen of Economcs, Faculy of Socal Scences Unversy of Lagos, Akoka Lagos, Ngera. Arcle Info: Receved : January 12, Revsed : February 23, Publshed onlne : July 1, 2016

2 84 Ernes Smeon Odor and Isaac Chn. Nwaogwugwu 1 Inroducon Cenre Banks role n mananng macroeconomc and fnancal secor sably would be srongly nfluenced by he effecveness of he moneary polcy mplemenaon or he effecveness of moneary nsrumens (Prapnngsh, 2010). To some exen, some leraure argued ha changes n he moneary polcy varables can have a sgnfcan mpac on he movemens n he sock marke, snce sock marke has become one of he man elemens n nfluencng macroeconomc sably, movemens n he sock marke can have a sgnfcan mpac on he macro- economy. Over he years has become of grea argumen wheher or no moneary polcy sgnfcanly affecs sock marke effcency and all share prce ndex. Economc scholars (Chude and Chude 2013; Ossanwo and Aanda, 2012; Maku and Aanda, 2009; Omole, 1999, and Ikoku, 2007). These fnancal analyss argued ha sock prces are nfluenced by some macroeconomc varables such as broad money supply, moneary polcy rae, gross domesc produc (GDP), exchange rae and nflaon. Some emprcal sudes have been carred ou o suppor her clam. I s of grea mporance ha moneary polcy s dffused no he real economy properly, hs can only be acheved hrough varous channels noably neres rae channel, cred channel and he prce level. A moneary polcy ha s amed a neres rae conrol may be eher drec or ndrec. When s drec s specfcally appled o he porfolo or balance shee of banks n he fnancal sysem usng selecve cred conrol, sablzaon secures, and admnsered neres raes o menon bu a few. An ndrec moneary polcy regme uses marke deermned nsrumens such as open marke operaons, varable redscoun rae and reserve requremens. A moneary polcy framework ha has s arge a eher he consumer prce ndex or producer prce ndex s amed a nflaon. On he oher hand he cred channel of ransmsson s dreced a cred avalably hrough deb or equy marke. The cred channel s merely an amplfyng mechansm and no ndependen of he neres rae channel (Bernanke and Gerler, 1995). The relaonshp beween broad moneary polcy and sock marke reurns n Ngera has been a grea concern n any economy. The CBN uses a wdespread of nsrumens o see o acheve hese goals. They nclude, moneary polcy rae, open marke operaons hrough buyng and sellng of governmen secures and changes n moneary aggregae; narrow and broad money, CBN cerfcaes, specal Ngeran reasury blls (NTBs), dscoun wndow operaons, repurchases ransacons (repo) blls dscounng, pledges and open buy back (OBB). The overall am s o manan a favourable and conducve envronmen for economc growh and developmen. Followng he seres of reforms and polces on macroeconomc varables over he years alongsde wh sock marke reurns and prce ndex, could no be sad ha here exss any relaonshp beween moneary polcy and sock marke reurns n Ngera? The relaonshp beween he change n Ngera Sock Marke Reurns and change n moneary polcy has araced srong debae among analyss based on her sudes of developed and emergng markes lke Ngeran capal marke and he level of low performance of Ngeran capal marke. The sock marke houses a large chunk of he naon s wealh and has connued o be he major dscuss of varous sudes snce he adven of he global fnancal crss. The Ngera Sock Marke (NSE 30) ncreased o ndex pons n Aprl from Index pons n March of Sock Marke n Ngera averaged Index pons from 2010 unl 2014, reachng an all-me hgh of Index pons n January of 2014 and a

3 Effcency of he Ngeran Sock Marke 85 record low of Index pons n January of The Ngeran Sock Exchange NSE 30 Index s a major sock marke ndex whch racks he performance of 30 mos lqud socks represenng ndusry secor, lsed on he Ngeran Sock Exchange. I s a capalzaon-weghed ndex. The NSE 30 Index has a base value of 1000 as of January 1, Wh he recen declne observed n he Ngeran sock marke, varous sudes have examned he effecveness of moneary polcy on mprovng he performance of he Ngeran sock exchange. E.g. Osssanwo and Aanda (2012); Maku and Aanda (2010); whle mananng fnancal sysem sably remans a core objecve of he Cenral Bank of Ngera, he evdence concernng he relaonshp beween he sock marke and moneary polcy varables n Ngera sll offers some mehodologcal gaps. The challenges n he global economy have rased ssues concernng he susanably of emergng capal markes, especally he Ngeran capal marke. Capal marke s he par of he fnancal marke ha provdes facles for ransfer of medum and long-erm funds o varous economc uns. There have been quesons agang mnds of scholars abou he sudden urn of evens n boh posve and negave sdes on he Ngeran Sock Exchange (NSE). Why s he downward growh rae of he sock marke drasc and muaonal and no evoluonary or gradual? Why he nsably s so sharp and has become dffcul for he Ngeran capal marke o rebound along wh oher markes around he world? Accordng o (Chnweoke, (2012), he bgges hrea we have n he marke s he moneary polcy drecon of he governmen. If he auhores decde o drve a resrcve moneary polcy so as o keep nflaon down, hs would lead o ncrease n he neres raes. If neres raes connue o go up, fxed ncome nsrumen would become more aracve o nvesors. Conversely, f neres raes go down, nvesors would see equy marke as of beer aracon han he fxed ncome marke. So, he greaes hrea o connued equy marke recovery s he moneary polcy drecons of he Cenral) The focus of hs sudy s o emprcally nvesgae he relaonshp beween sock performance n he Ngeran sock exchange marke (NSE) and conemporary moneary polcy nsrumens n Ngera. Followng he fac ha moneary polcy varables have aken dfferen values over he years alongsde he marke sock prce ndex, can be sad ha here exss any relaonshp beween he key pure moneary polcy varables and sock marke ndex n Ngera? On hs bass, hs research paper nvesgaes he mpac relaonshp beween he varable deermnans and sock marke capalsaon n Ngera. The remanng par of hs paper s organsed as follows. Secon wo s he revew of some relevan heorecal and emprcal leraure. Secon hree shows he heorecal framework, whle secon four s he model specfcaon and varable defnons. Secon fve s he model esmaon sraegy, whle s sx he analyss of emprcal resul of he sudy. Secon seven and egh, gve he concluson and polcy mplcaon and recommendaons of he sudy, respecvely. 2 Bref Revew of Relevan Leraure A sock marke, or equy marke, s a prvae or publc marke for he radng of company sock and dervaves of company sock a an agreed prce; hese are secures lsed on a sock exchange as well as hose only raded prvaely. In oher words, a sock marke or exchange s he cenre of a nework of ransacons where secures buyers mee sellers a a ceran prce. A sock marke or exchange s no necessary a physcal facly and wh he

4 86 Ernes Smeon Odor and Isaac Chn. Nwaogwugwu advancemen of nformaon echnology are ncreasngly rare hose raders ha exchange her socks n he floor of a major sock exchange. There s an exensve heorecal leraure dscussng he ransmsson channels hrough whch moneary polcy affecs sock marke operaon. Reflecng he mporance of hs ssue, here s a well-esablshed heorecal leraure documenng he negave mpac of moneary ghenng on sock marke reurns. Ths s an area of research ha has neresed moneary and fnancal economss for a long me. Moneary economss have been neresed n he queson wheher moneary polcy has any effec on real sock prces, whle fnancal economss have nvesgaed wheher equy s a good hedge agans nflaon. Emprcal sudes show ha money can be helpful n predcng fuure sock reurns. Sock prces are among he mos closely monored asse prces n he economy and are commonly regarded as beng hghly sensve o economc condons. In he conex of he ransmsson mechansm hrough he sock marke, moneary polcy acons affec sock prces, whch hemselves are lnked o he real economy hrough her nfluence on consumpon spendng (wealh effec channel) and nvesmen spendng (balance shee channel) (Bernanke and Kuner, 2005). Despe he sound heorecal foundaon of he prevous argumens, few sudes have aemped o drecly lnk moneary polcy shocks o he well documened sock marke anomales (e.g. sze, value and momenum anomales). Apar from broad sock marke ndces, mos of he exsng sudes have focused on he behavour of ndusry reurns n an aemp o examne he cross-seconal varaon n he mpac of moneary polcy shocks (Thorbecke, 1997, Jensen and Mercer, 2002). Bu as Cochrane (2008) noes: The challenge s sraghforward: We need o undersand wha macroeconomc rsks underle he facor rsk prema, he average reurns on specal porfolos ha fnance research uses o crysallze he cross secon of asses. The semnal sudes of Jensen and Johnson (1995), Thorbecke (1997), Paels (1997), Lobo (2002) and Bernanke and Kuner (2005) provde characersc examples. Conover, Jensen and Johnson (1999) confrm hs paern n an nernaonal seng, whle Lobo (2002) shows ha moneary polcy shocks have an effec on sock marke volaly oo. Usng a dvdend dscoun model for equy valuaon, mos researchers manly focus on wo ways hrough whch moneary polcy affecs sock prces (Smrlock and Yawz, 1985). Moneary polcy can affec he raes ha marke parcpans use o dscoun fuure cash flows as well as expeced cash flows hemselves (Paels, 1997). As Bernanke and Kuner (2005) pon ou, some observers vew he sock marke as an ndependen source of macroeconomc volaly o whch polcymakers may wsh o respond. Sock prces ofen exhb pronounced volaly and boom-bus cycles leadng o concerns abou susaned devaons from her fundamenal values ha, once correced, may have sgnfcan adverse consequences for he broader economy. Hence, esablshng quanavely he exsence of a sock marke response o moneary polcy changes wll no only be germane o he sudy of sock marke deermnans bu wll also conrbue o a deeper undersandng of he conduc of moneary polcy and of he poenal economc mpac of polcy acons or nacons. Some emprcal sudes ndcae ha nvesors beleved ha moneary polcy and macroeconomc varables have a large nfluence on he volaly of sock prces. Chrsopher e al (2006) sae ha macroeconomc varables such as broad money supply can nfluence nvesor nvesmen decson and as well movae many researchers o nvesgae he relaonshp beween sock marke reurns and macroeconomc varables.

5 Effcency of he Ngeran Sock Marke 87 Osssanwo and Aanda (2012) used ordnary leas square mehod o sudy he deermnans of sock marke reurns n Ngera: A me seres analyss beween 1984 and They founds ha neres rae, prevous sock reurn levels, money supply and exchange rae are he man deermnans of sock marke reurns n Ngera. Usng modfed Error Correcon Model Approach o examne he deermnans of sock marke developmen n Ngera. Ia e al (2010) reveal ha sock marke lqudy, neres rae and one perod lagged sock marke developmen were sgnfcan predcors of sock marke developmen n Ngera. Employng Johansen conegraon and Granger causaly ess n nvesgang he mpac of he Ngeran capal marke on economc growh, Kolap and Adaramola (2012) found ha he Ngeran capal marke and economc growh are conegraed; meanng ha here s relave posve mpac of he Ngeran capal marke on he economc growh of he counry. In a sudy Capal marke as a verable source of developmen n Ngera economy usng Ordnary Leas Square and cochrane Orcu erave mehods, Josah, Samson and Josah e al (2012) observed ha he capal marke has no conrbued posvely o he developmen of he Ngeran economy. Though, here s a posve relaonshp beween he rae of ransacons n he capal marke and he developmen of Ngeran economy. Maku and Aanda (2010) examned he deermnans of sock marke performance n Ngera usng Augmened Dckey-Fuller un roo es, Augmened Engle Granger Conegraon es and Error Correcon Model. The emprcal analyss showed ha he NSE all-share ndex s more responsve o changes n exchange rae, nflaon rae, money supply, and real oupu. Whle, he enre ncorporaed macroeconomc varables were found o have smulaneous and sgnfcan mpac on he Ngeran capal marke performance n he long-run. Also, (Osuagwu, 2009), nvesgaes he effec of moneary polcy on sock marke performance n Ngera usng ordnary leas square; co-negraon and error correcon model. I was dscovered ha sock marke performance s srongly deermned by broad money supply, exchange raes and consumer prce ndex n he shor and long-run. Laopods (2010) provded exensve evdence for he me-varyng relaonshp beween Fed funds rae and he general sock prce ndex. Park and Ra (2000) also examned hs relaonshp across dfferen moneary polcy regmes. If hs mpac vares hrough me, hen hs fndng could be a poenal explanaon for he documened nsably of some of hese anomales prema. Moreover, he mevaraon of hs mpac can help us evaluae he hypohess of Bernanke and Gerler (1995) ha some channels for he ransmsson of moneary polcy may become nacve. In parcular, followng Clarda e al (2000), we spl he sample usng 1983 as cu-off pon snce around ha me Volcker s dsnflaon msson was largely accomplshed. Volcker s frs years of enure were assocaed wh src an-nflaonary polces whch evenually ushered he grea moderaon perod, characerzed by low nflaon, neres raes and overall macroeconomc volaly. The selecon of hs me pon for splng he full sample perod s srongly suppored by he Chow- ype break es of Candelon and Lukepohl (2001). Serkan (2008) nvesgaes he role of macroeconomc facors n explanng Turksh sock reurns. He employed macroeconomc facor model from he perod of July 1997 o June The macroeconomc varables consdered are growh rae of ndusral producon ndex, change n consumer prce ndex, growh rae of narrow money supply, change n exchange rae, neres rae, growh rae of nernaonal crude ol prces and reurn on he MSCI World Equy Index. He found ha exchange rae, neres rae and world marke reurn seem o affec all of he porfolo reurns, whle nflaon rae s sgnfcan for only hree of he welve porfolos. Also, ndusral producon, money supply and ol prces do

6 88 Ernes Smeon Odor and Isaac Chn. Nwaogwugwu no appear o have sgnfcan effec on sock reurns n Turkey. Kyereboah, Anhony and Agyre (2008) examned how macroeconomc ndcaors affec he performance of Ghana sock marke usng quarerly me seres daa coverng he perod of 19991o They found ha lendng raes from depos money banks have an adverse effec on sock marke performance and parcularly serve as major hndrance o busness growh n Ghana. Inflaon rae was found o have a negave effec on sock marke performance. Also, Tsoukalas (2003), suded he relaonshp beween sock prces and macroeconomc facors n Cyprus usng he Vecor Auoregressve model. The varables examned nclude exchange rae, ndusral producon, money supply, and consumer prces. The resul of he sudy ndcaes a srong relaonshp beween sock prces and all he macroeconomc facors. Sharma and Sngh (2007) used rae of neres, exchange rae, ndusral producon ndex, money supply and nflaon as explanaory varables whle AR and MA as served as explanaory varable o remove effecs of non-saonary n he daa. Hs fndng revealed ha lags values are hghly correlaed wh curren prces sugges speculaon n marke. Exchange rae, ndusral producon ndex and money supply s sgnfcanly relaed, he ook daa se from 1986 o From he foregong dscussons, we noe ha he bulk of sudes cenred on he US sock marke sequel o he Ocober 19h, 1987 crash and oher counres. Also, hese sudes ofen mes exclude he mpac of neres rae - a major componen of moneary polcy aggregae. However, n Ngera, Aknnfes (1988) looked a he effec of neres rae deregulaon (no he effecs of neres rae) on sock prces. Specfcally, hs sudy ncludes he effec of money supply on sock prces. Ologunde e al (2006) examne he relaonshps beween sock marke capalzaon rae and neres rae. They found ha prevalng neres rae exers posve nfluence on sock marke capalzaon rae. They also found ha governmen developmen sock rae exers negave nfluence on sock marke capalzaon rae and prevalng neres rae exers negave nfluence on governmen developmen sock rae. Maku and Aanda (2009) examned he long-run and shor-run macroeconomc shocks effec on he Ngeran capal marke beween 1984 and They examned he properes of he me seres varables usng he Augmened Dckey-Fuller (ADF) es and Error Correcon Model (ECM). However, he emprcal analyss showed ha he NSE all-share ndex s more responsve o changes n exchange rae, nflaon rae, money supply and real oupu. Therefore, all he ncorporaed varables ha serve as proxes for exernal shock and oher macroeconomc ndcaors have smulaneous sgnfcan mpac on he Ngeran capal marke boh n he shor and long-run. 3 Theorecal Framework In hs heorecal framework, we frs presen he Ioannds and Kononkas (2006) heorecal background of he role of moneary polcy n explanng he sock marke and hen he conemporaneous relaonshp beween moneary condons and sock marke capalzaon reurns as a proxy for marke effcency.

7 Effcency of he Ngeran Sock Marke Moneary Polcy and he Sock Marke: Theorecal Background The presen value or dscouned cash flow model offers useful nsghs on he sock marke effecs of moneary polcy changes. Accordng o hs wdely used model he sock prce ( S ) s he presen value of expeced fuure dvdends ( D j ). Under he assumpon of consan dscoun rae (R), can be shown ha: j K K 1 1 S D j SK j1 1R 1R (1) where, s he condonal expecaons operaor based on nformaon avalable o marke parcpans a me, R s he rae of reurn used by marke parcpans o dscoun fuure dvdends, and K s he nvesor s me horzon (sock holdng perod). The sandard ransversaly condon mples ha as he horzon K ncreases he second erm n he rgh- hand sde of Equaon (1) vanshes o zero (no raonal sock prce bubbles): To derve Equaon (1) we may assume for smplcy ha here s an nvesor wh wo alernave nvesmen opporunes over a one-perod horzon: eher a sock wh expeced gross reurn [ S 1 D 1]/ S, or a rsk- free bond wh consan nomnal gross reurn 1 R. Arbrage opporunes mply ha, for he nvesor o be ndfferen beween he wo alernaves, hey mus yeld he same expeced reurn [ S 1 D 1]/ S 1 R. We hen solve forward he resulng expecaonal dfference equaon and oban Equaon (2). K 1 lm SK 0 K 1 R (2) To llusrae he well-esablshed effecs of moneary polcy on sock prces, we employ he sandard dvdend dscoun or presen value model. Afer applyng he commonly used models of raonal bubbles ha relax he ransversaly condon, he famlar Campbell, Lo and MacKnlay, (1996) verson of hs model s j K 1 S D j (3) j1 1 R Equaon (3) ndcaes ha a change n moneary polcy can affec sock reurns n a dual manner. Frs, here s a drec effec on sock reurns by alerng he dscoun rae used by marke parcpans. Tgher moneary polcy leads o an ncrease n he rae a whch frms fuure cash flows are capalsed causng sock prces o declne. The underlyng assumpons are ha, frs, he dscoun facors used by marke parcpans are generally lnked o marke raes of neres and second, he cenral bank s able o nfluence marke neres raes. Second, moneary polcy changes exer an ndrec effec on he frms sock value by alerng expeced fuure cash flows. Moneary polcy easng s expeced o ncrease he overall level of economc acvy and he sock prce responds n a posve manner

8 90 Ernes Smeon Odor and Isaac Chn. Nwaogwugwu (expecng hgher cash flows n he fuure). Hence, hs channel generally assumes he exsence of a lnk beween moneary polcy and he aggregae real economy. As Paels (1997) argues, socks are clams on fuure economc oupu, so f moneary polcy has real economc effecs hen sock markes should be nfluenced by moneary condons. In he nex secon we revew he prevous emprcal evdence on he lnks beween moneary polcy, he real economy, and he sock marke. 3.2 Moneary Polcy and Conemporaneous Sock Reurns We exend he leraure ha examnes he conemporaneous relaonshp beween moneary polcy and sock reurns by ulzng a more up-o-dae daase, by checkng he robusness of he emprcal fndngs o ncluson of dvdend paymens n sock reurns, and by akng no accoun he non-normaly nheren n our daa as well as he sgnfcan co movemen of nernaonal sock markes. We also esmae he mpac of moneary polcy shfs on expeced sock reurns across a varey of reurns specfcaons. The conemporaneous relaonshp beween moneary condons and sock reurns s examned usng he followng regresson model: S r (4) where S s a measure of equy reurns (measured n local currency). The measures used n hs sudy are nomnal reurns (wh and whou dvdends), and real reurns (wh and whou dvdends). The ndependen varable r, denoes our measure of moneary polcy changes. I s assumed ha posve (negave) values of he change of he shor-erm rae are assocaed wh a resrcve (expansve) moneary envronmen. If he coeffcen s negave and sascally sgnfcan, hen s mpled ha moneary ghenng depresses he sock marke whn he same monh ha he neres raes ncrease(s) occurred. Equaon (4) has been frequenly used n he fnancal economcs leraure wh prevous nernaonal evdence broadly supporng a negave relaonshp beween sock reurns and (he level or he frs dfference of) neres raes. In he leraure ha examnes he effec of nflaon on sock prces, usng a generalsed Fsher effec framework (whch relaes nomnal sock reurns wh expeced nflaon), expeced nflaon s ofen proxed by he nomnal reasury bll rae a he begnnng of he perod, see e.g. Fama and Schwer (1977). Fama and Schwer jusfy hs approach by observng ha almos all of he varably n he nomnal TB rae s due o revsons of nflaon expecaons (see also Fama, 1975). More recen leraure on moneary polcy rules also suggess a posve correlaon beween he level of shor-erm neres raes and nflaon (Taylor, 1993). We esmae equaon (4) usng boh sngle and mulvarae esmaors whls makng nferences under boh heeroscedascy conssen varance esmaors and es sascs obaned by usng he boosrap. Thus, our resuls are robus o boh he measure of he change n moneary polcy and he employed nferenal and esmaon procedures.

9 Effcency of he Ngeran Sock Marke 91 4 Model Specfcaon and Defnon of Varables Wh nferences from he revewed heorecal framework model, an emprcal model o dlae he relaonshp beween sock marke and moneary polcy n Ngera would be specfed based on equaons (1 and 4). Alhough he varables usually used o provde suppor for he hypohess ha changes n moneary polcy affec sock marke effcency dffer across sudes, boh equaons are consdered as he benchmark for sock marke n hs emprcal sudy. Ths sudy fundamenal Moneary Polcy Facors (MPF) ha deermne sock marke effcency are gven by he equaon below: Moneary Polcy Rae, Cash Reserve Rao, Lqudy Rao,Treasury Blls, MPF f Drec Cred Conrol, Exhange Rae, Moneary Aggregaes (5) In order o examne he relaonshp beween he sock marke effcency and moneary polcy, we ake lnear approxmaon of he funconal form of he model (equaon 5) and add error erm ( ). Ths yelds an economerc equaon. On he bass of he above funconal form, our sochasc model specfcaon equaon n s emprcal forms s specfed as follow: SMC =α 0+α1MPR +α 2CRR +α3lqr+α 4TBR +α 5DCC +α6exr +α7bms + μ (6) where SMC s Sock Marke Capalzaon s Value a me. Ths s a proxy for sock marke effcency n hs sudy ha s aken as he explaned varable. SMC s he marke value of a company's ousandng shares. Marke capalzaon represens he aggregae value of a company or sock. I s obaned by mulplyng he oal number of shares ousandng by her curren prce per share. MPR, s he Moneary Polcy Rae a me. To capure he mpac of moneary ransmsson hrough he neres rae channel we have chosen he mnmum redscoun rae recenly chrsened moneary polcy rae n Ngera. I s he rae a whch he cenral bank n Ngera lends money o banks o mee her mmedae cash calls. I s a penaly rae and mos mes s he anchor of bank lendng rae. The Cenral Bank lends o fnancally sound Depos Money Banks a a mos favourable rae of neres, called he mnmum redscoun rae (MRR). The MRR ses he floor for he neres rae regme n he money marke (he nomnal anchor rae) and hereby affecs he supply of cred, he supply of savngs (whch affecs he supply of reserves and moneary aggregae) and he supply of nvesmen (whch affecs full employmen and GDP). The MPR, he Bank s benchmark polcy rae, remaned he major sgnallng nsrumen accompaned by neres rae corrdor (sandng lendng/depos facly raes) (see CBN, 2011, 2013). The Bank reaned he use of reserve requremens (Cash Reserve Rao (CRR) and Lqudy Raos (LQR) n he revew perod o complemen OMO and oher nsrumens of lqudy managemen. The Cenral Bank may requre Depos Money Banks o hold a fracon (or a combnaon) of her depos lables (reserves) as vaul cash and or deposs wh. Fraconal reserve lms he amoun of loans banks can make o he domesc economy and hus lm he supply of money. The assumpon s ha Depos Money Banks generally manan a sable relaonshp beween her reserve holdngs and he amoun of

10 92 Ernes Smeon Odor and Isaac Chn. Nwaogwugwu cred hey exend o he publc. Ths nsrumen s used by he cenral bank o nfluence he level of bank reserves and hence, her ably o gran loans. Reserve requremens are lowered n order o free reserves for banks o gran loans and hereby ncrease money supply n he economy. On he oher hand, hey are rased n order o reduce he capacy of banks o provde loans hereby reducng money supply n he economy. CRR, s he Cash Reserve Requremen a me and LQR s he Lqudy rao a me. The compuaon of he CRR wll be based on each bank s oal depos lables (.e. demand, savngs and me deposs of boh prvae and publc enes), cerfcaes of depos, and promssory noes held by non-bank publc and oher depos ems. TBR s he Treasury Blls Rae a me. Treasury Blls s proxy as Open Marke Operaons. The mos mporan and flexble ool of moneary polcy s open marke operaons. I s he buyng and sellng of governmen secures n he open marke (prmary or secondary) n order o expand or conrac he amoun of money n he bankng sysem. By purchasng secures, he cenral bank njecs money no he bankng sysem and smulaes growh whereas by sellng secures absorbs excess money. Thus, f here s excess lqudy n he sysem, he cenral bank wll n a bd o reduce he money supply sell he governmen secures such as Treasury Blls. On he oher hand, n perods of lqudy shorages, he cenral bank buys governmen secures so as o ncrease money supply. Insrumens commonly used for hs purpose nclude reasury blls, cenral bank blls, or prme commercal paper (see CBN, 2011, 2013). The Cenral Bank buys or sells ((on behalf of he Fscal Auhores (he Treasury)) secures o he bankng and non-bankng publc (ha s n he open marke). One such secury s Treasury Blls. When he Cenral Bank sells secures, reduces he supply of reserves and when buys (back) secures-by redeemng hem- ncreases he supply of reserves o he Depos Money Banks, hus affecng he supply of money. OMO enables he cenral bank o nfluence he cos and avalably of reserves and brng abou desred changes n bank cred and money supply. Ths mporan nsrumen of moneary polcy has a number of advanages because s flexble and precse, s mplemened quckly and easly reversed and he cenral bank has complee conrol. The effecveness of OMO, however, depends on he exsence of well-developed fnancal markes ha are sensve o neres rae movemens. DCC s he Drec Cred Conrol a me. The Cred o he Prvae Secors (DCC) s proxy by Drec Cred Conrol: s a Drec Insrumens of Moneary Polcy. The Cenral Bank can drec Depos Money Banks on he maxmum percenage or amoun of loans (cred celngs) o dfferen economc secors or acves, neres rae caps, lqud asse rao and ssue cred guaranee o preferred loans. In hs way he avalable savngs s allocaed and nvesmen dreced n parcular drecons as desred by he auhores (see CBN, 2011, 2013). EXR s he Exchange Rae a me. To capure he exchange rae ransmsson channel of moneary polcy we have ncluded he daa of offcal exchange rae of he Ngera Nara vs-à-vs he Uned Saes dollar. Whle, BMS s he Broad Money Supply a me. For moneary aggregaes we have employed broad money as a proxy for money supply. 0 s consan, 17are slopes and ~NIID(0,1) hus, a whe nose sochasc dsurbance erm and me s n annually. In order o reduce errors.

11 Effcency of he Ngeran Sock Marke 93 5 Esmaon Sraegy In lne wh he above analycal framework, hs sudy uses he ADF-Fsher Ch-square un roo es o deermnaon he order of negraon and usng he Engle-Granger sngleequaon o es for he conegraon. Fnally, he dynamc Weghed Leas Squares (DWLS) regresson mehod o deermne he long and shor run dynamc mpac esmaes whch s run over he sample perod The conegraon erm s known as he error correcon erm snce he devaon from long-run equlbrum s correced gradually hrough a seres of paral shor-run adjusmens Granger and Engle (1987). Haven proved ha co-negraon s a suffcen condon for an ECT formulaon, f varables are nonsaonary a level, bu conegraed, her dynamc relaonshps wll be specfed correcly by an error correcon model. Ths choce of he esmaon echnque (he WLS regresson model) s he fac ha weghed leas squares model bes capure seres wh known form heeroskedascy, whose values are proporonal o he recprocals of he error sandard devaons. We use he weghed leas squares, wh wegh seres, o correc for he heeroskedascy. The model performs weghed leas squares by frs dvdng he wegh seres by s mean, hen mulplyng all of he daa for each observaon by he scaled wegh seres. The scalng of he wegh seres s a normalzaon ha has no effec on he parameer resuls, bu makes he weghed resduals more comparable o he unweghed resduals. The normalzaon does mply, however, ha he weghed leas squares are no approprae n suaons where he scale of he wegh seres s relevan, as n frequency weghng. If he heeroskedascy s known he mos sraghforward mehod of correcng heeroskedascy s by he means of weghed leas squares for he esmaors hus he obaned are BLUE. We model he heeroskedascy o oban more effcen esmaes usng weghed leas squares. Esmaon s hen compleed by runnng a regresson usng he weghed dependen and ndependen varables o mnmze he sum-of-squared resduals, n a more general form we wre he equaon as: 2 2 S( ) w ( y x ) (7) wh respec o he k -dmensonal vecor of parameers. In marx noaon, le W be a dagonal marx conanng he scaled w along he dagonal and zeroes elsewhere, and le y and X be he usual marces assocaed wh he lef and rgh-hand sde varables. The weghed leas squares esmaor s b ( X W WX ) 1 X W W (8) WLS and he esmaed covarance marx s y ˆ 2 1 ( ) WLS s X W WX (9) The weghed summary sascs are based on he fed resduals, compued usng he weghed daa: uˆ w ( y x b ) (10) WLS

12 94 Ernes Smeon Odor and Isaac Chn. Nwaogwugwu Dynamc Specfcaon of Model 2 From equaon 6, we assumed ha he heeroscedasc varances are known. We dvde equaon (6) hrough by, he nverse varance 2 1 o oban equaon 11 SMC 1 MPR CRR LQR TBR DCC EXR BMS u (11) We rewre ransformed equaon (11) n a lnear form as SMC 0 1 MPR 2 CRR 3 LQR 4 TBR 5 DCC 6 EXR 7 BMS u (12) The unransformed equaon (6) could be se n a dynamc model as: D( SMP) 0 1MPR(-1) 2CRR(-1) 3LQR(-1) 4TBR(-1) 5DCC(-1) 6EXR(-1) (13) BMS(-1) u 7 Wh he formulaed ransformaon model wh an nverse varance 2 1 we specfc he esng equaons (12) n s emprcal dynamc long and shor run form respecvely, as: D( SMC ) MPR (-1) CRR (-1) LQR (-1) TBR (-1) DCC (-1) EXR (-1) * * * * * * * * * * * * * * BMS (-1) u * * * 7 (14) D( SMC ) D( MPR (-1)) D( CRR (-1)) D( LQR (-1)) D( TBR (-1)) D( DCC (-1)) * * * * * * * * * * * * D( EXR (-1)) D( BMS (-1)) u * * * * * 6 7 (15) where he ransformed, varables are he orgnal varables dvded by (he known). We used he noaon 0 1, 2, 3, 4, 5, 6 and 7 he parameer of he ransformed model, o dsngush hem from he usual OLS parameers 0, 1, 2, 3, 4, 5, 6 and 7 (see Gujara and Sangeeha, 2007 ransformaon purpose) For he sake of esng and evaluaon of he praccal reasonably of he would-be esmaed slope parameers, we oulne our apror expecaon of he sgn and magnude of each ncluded parameer, based on he provsons of heory and he fndngs of prevous sudes by scholars wh smlar neres. On he bass of he above heorecal consderaon he followng provdes a summary of he expeced relaonshps beween he explanaory varables consdered n he model and he explaned varable (SMC). Therefore, we expec as he apror expecaon he parameers 0, 1, 3 and 4 o be less han zero, whle 2, 5, 6 and 7 are expeced o be greaer han zero. The above sgn ( 0 ) mples a negave relaonshp beween he explaned and he explanaory varables, whle sgn ( 0 ) ndcae posve relaonshp.

13 Effcency of he Ngeran Sock Marke 95 The daa for hs sudy were generaed n lne wh he perod covered by he sudy whch s , a perod of 34. The me frame s chosen o cover he eras of economc programmes n Ngera, lke he Pre Srucural Adjusmen Programme (SAP), Srucural Adjusmen Programme (SAP), Pos-Srucural Adjusmen Programme (Pos- SAP). In order, o acheve he research objecve precsely, hs chaper focused on he model descrpon of he mehodology employed for dealed economerc analyss. The sudy manly based on he nformaon obaned from he Cenral Bank of Ngera Sascal Bullen and Moneary Polcy Revew. They were obaned from Cenral Bank of Ngera (CBN, 2010, 2012 and 2013). 6 Analyss of Emprcal Resuls 6.1 Saonary Tes In hs subsecon, we frs valdae f he varables are saonary. Table 1 presens he summary of he resuls of he nermedae un roo ess on he sock marke and he explanaory varables n hs sudy for he order of negraon of he varables under nvesgaon usng he ADF - Fsher Ch-square mehod. From he un roo es resul n Table 1, he ess confrm ha all varables are nonsaonary and could be consdered as negraed of order one I(1) or hey were saonary a frs dfference by comparng he varables frs dfference -sac values wh he varous probables and he T-bar crcal values. All he varables were sascally sgnfcan a 1%, 5% and 10% crcal values n frs dfference. Ths mples ha all he seres are non-saonary a levels. Therefore he null hypohess ( = 1) s acceped a levels and he null hypohess ( = 1) ha he seres are non-saonary afer he frs dfference s rejeced for all he seres. Maxmum lags were se a 1and lag lengh was deermned by AIC. Snce he seres were found o be negraed of he same order, he sudy hen proceeds o esablsh a conegrang relaonshp among he varables.

14 96 Ernes Smeon Odor and Isaac Chn. Nwaogwugwu Table 1: Saonary Tes Resul Null Hypohess: Un roo (ndvdual un roo process) Mehod Sasc Prob.** ADF - Fsher Ch-square ADF - Cho Z-sa ** Probables for Fsher ess are compued usng an asympoc Ch-square dsrbuon. All oher ess assume asympoc normaly. Inermedae ADF es resuls - T-bar crcal values ***: 1% level % level % - level Inermedae ADF es resuls level - Seres Sa Probably 1 s dff -Sa Probably D(SMC(-1)) I( 1) D(MPR(-1)) I( 1) D(CRR(-1)) I( 1) D(LQR(-1)) I( 1) D(TBR(-1)) I( 1) D(DCC(-1)) I( 1) D(EXR(-1)) I( 1) D(BMS(-1)) I( 1) Source: Auhor s Compuaon 6.2 Engle-Granger Sngle-Equaon Conegraon Tes Order of negraon In he second sep, he Engle-Granger sngle- equaon connegraon es s used o confrm he exsence of a conegrang vecor and he resuls are repored n Table 2. Lookng a he es descrpon, we frs confrm ha he es sasc s compued usng consan and Trend as deermnsc regressors, and noe ha he choce o nclude a sngle lagged dfference n he ADF regresson was deermned usng auomac lag selecon wh a Schwarz creron and a maxmum lag of 1.

15 Effcency of he Ngeran Sock Marke 97 Table 2: Engle-GrangerConegraon Tes Resuls Dependen au-sasc Prob.* z-sasc Prob.* D(SMC(- 1)) D(MPR(- 1)) D(CRR(- 1)) D(LQR(- 1)) D(TBR(- 1)) D(DCC(- 1)) D(EXR(- 1)) D(BMS(- 1)) *MacKnnon (1996) p-values. Inermedae Resuls D(SMC(-D(MPR(-D(CRR(- D(LQR(- D(TBR(- D(DCC(- D(EXR(- D(BMS(- 1)) 1)) 1)) 1)) 1)) 1)) 1)) 1)) Rho Rho S.E. Resdual varance Long-run resdual varance Number of lags Number of observaon s Number of sochasc rends** **Number of sochasc rends n asympoc dsrbuon Source: Auhor s Compuaon As o he ess hemselves, he Engle-Granger au-sasc (-sasc) and normalzed auocorrelaon coeffcen (whch we erm he z-sasc) boh rejec he null hypohess of no conegraon (un roo n he resduals) a he 5% sgnfcance level. The probably values are derved from he MacKnnon response surface smulaon resuls. Gven he small

16 98 Ernes Smeon Odor and Isaac Chn. Nwaogwugwu sample sze of he probables and crcal values here s evdence of one conegrang equaon a he 10% level of sgnfcance usng he au-sasc (-sasc) and evdence of fve conegrang equaon a he 5% level of sgnfcance usng he z-sasc Ths mples ha he boh dd no rejeced he null hypohess of no conegraon among he varables a he 10 per cen level of sgnfcance. On balance, usng he au-sasc (z-sasc) he evdence clearly suggess ha SMC. MPR, CRR, TBR and BMS are conegraed. Ths mples ha here exss a long-run relaonshp or conegraon beween he sock marke capalsaon and hese varables. In Table 2, he mddle secon of he oupu dsplays nermedae resuls used n consrucng he es sasc ha may be of neres. Frs, he Rho S.E. and Resdual varance are he (possbly) degree of freedom correced coeffcen sandard error and he squared sandard error of he regresson. Nex, he Long-run resdual varance s he esmae of he long-run varance of he resdual based on he esmaed paramerc model. The esmaor s obaned by akng he resdual varance and dvdng by he square of 1 mnus he sum of he lag dfference coeffcens. These resdual varance and long-run varances are used o oban he denomnaor of he z-sasc. Lasly, he number of sochasc rends enry repors he value used o oban he p-values. 6.3 Inerpreaon of Esmaed Coeffcens The nex sep afer esablshng he conegraon s o esmae he long and shor run dynamc coeffcens by esmang he WLS model n equaons (14) and (15). Ths procedure begns wh an approprae lag specfcaon of he model. The consderaon of he avalable degrees of freedom and ype of daa deermne he decson on lag lengh. Wh annual daa, one lag would be long enough. Under hs ECT procedure, he long and shor run relaonshp are embedded whn he dynamc specfcaon.

17 Effcency of he Ngeran Sock Marke 99 Table 3: Dynamc Weghed Leas Squares Coeffcens Esmae Esmaon Mehod: Weghed Leas Squares Lnear esmaon afer one-sep weghng marx Weghng seres: 10 Wegh ype: Inverse sandard devaon Whe Heeroskedascy-Conssen Sandard Errors & Covarance * Dependen Varable: D( SMC ) Long Run Behavour of Varables Explanaory Varable Coeffcen Sd. Error -Sasc Prob. ECT(-1)1/ Consan ˆ 0 = MPR * (-1) ˆ 1 = CRR * (-1) ˆ 2 = LQR * (-1) ˆ 3 = TBR * (-1) ˆ 4 = DCC * (-1) ˆ 5 = EXR * (-1) ˆ 6 = BMS * (-1) ˆ 6 = Shor Run Behavour of Varables Consan ˆ 0 = * D( MPR (-1)) ˆ 1 = * D( CRR (-1)) ˆ 2 = * D( LQR (-1)) ˆ 3 = * D( TBR (-1)) ˆ 4 = * D( DCC (-1)) ˆ 5 = * D( EXR (-1)) ˆ 6 = * D( BMS (-1)) ˆ 6 = Deermnan resdual covarance Weghed Sascs R-squared Mean dependen var Adjused R-squared S.D. dependen var S.E. of regresson Sum squared resd F-sasc Weghed mean dep Breusch-Godfrey Seral Correlaon LM Tes for DW Prob(F-sasc) sa Source: Auhors Compuaon Noe: ECT: Speed of Adjusmen Parameer of he Error Correcon Term

18 100 Ernes Smeon Odor and Isaac Chn. Nwaogwugwu Esmaed Long-Run Relaonshp n a Sac Model Table 3 presens he long and shor run dynamc coeffcens wh her sandard errors, - values and probables exraced from he esmaed ECT. Boh long and shor run properes can be derved from he esmaons shown n Table 3. Frs, he esmaons presen he long run mpac of dsaggregaed moneary polcy nsrumens on he sock marke performances. The one perod lags value of he moneary polcy nsrumens have boh negave and posve mpac on sock marke performances proxed by marke capalzaon. A look a he regresson resuls ndcaes paral conformy of he resuls wh he posulaed heores. The conegraon s known as he Error Correcon Term (ECT) snce he devaon from long run equlbrum s correced gradually hrough a seres of paral shor run adjusmens. The negave coeffcen of ECT shows he speed of adjusmen annually of he endogenous varables oward equlbrum. The coeffcen of he equlbrum correcon erm (ECT), s sgnfcan, confrmng ha a long-run (conegrang) relaonshp exss beween he sock marke effcency as proxy by marke capalzaon and he se of explanaory varables. The sze of hs coeffcen and s P-value sgnfcance level of 5%, mples ha adjusmen o dsequlbra va he equlbrum correcon erm (ECT) (0.2739) s relavely slow, as percen of a dsequlbrum n a gven year s correced n he followng year. The resuls n show ha he moneary polcy rae (MPR), lqudy rao (LQR), drec cred conrol (DCC) and exchange rae (EXR) are negavely assocaed wh he sock marke capalzaon (SMC) n he long run gve her weghed esmaed coeffcens of MPR ( ), LQR ( ), DCC ( ) and EXR ( ). The negave sgns ndcaes ha a once-and-for-all un ncrease n he rae of annually CBN moneary polcy rae, lqudy rao, drec cred conrol and exchange rae, hen annually sock marke performance wll cause a long-run reducon of he sock marke capalzaon of abou 0.35%, , 1.22% and 0.021%, respecvely, when measured by he rue value. In oher words, a 1% percenage pon change n he annual rae of he CBN moneary polcy rae, lqudy rao, drec cred conrol and exchange rae mples a fall n SMC by 0.35%, , 1.22% and 0.021%, respecvely n he long run. The Long run resul also show ha, he regresson coeffcens of he cash reserve rao (CRR), reasury blls rae (TBR) and broad money supply (BMS) are posvely assocaed wh he sock marke capalzaon (SMC) n he long run gven her weghed esmaed coeffcens of CRR ( ), TBR ( ) and BMS ( ). The posve sgns ndcaes ha a once-and-for-all un ncrease n he rae of annually CBN he cash reserve rao, reasury blls rae and broad money supply, hen annually sock marke performance wll cause a long-run ncrease of he sock marke capalzaon of abou 0.094%, and 0.245%, respecvely, when measured by he rue value. In oher words, a 1% percenage pon change n he annual rae of cash reserve rao, reasury blls rae and broad money supply by he CBN, mples a long run rse n SMC by 0.094%, and 0.245%, respecvely Equlbrum-Correcon Sngle-Equaon Model The resuls n Table 3 repored he regresson esmae of equaons (14) and (15) n he conex of equlbrum error-correcon represenaon of he WLS model. Gven conegraon, equaon and esmaed confdens, an error correcon model s used because, he esmaon of sock marke effcency model largely ook place durng a perod n whch here are large real changes n he moneary polcy mplemenaon, for example,

19 Effcency of he Ngeran Sock Marke 101 nroducon of several polcy reforms by he CBN and he regulaon of he bankng secor. Therefore, here mus also be an error correcon model (ECM) ha descrbes he shor-run dynamcs or adjusmen of he conegraed varables owards her equlbrum values. The resul of he error correcon model shows ha mos of he varables are sascally sgnfcan n he shor erm excep for lqudy rao and exchange rae. The resul of ECM shows ha he lag value of MPR, EXR, LQR and DCC have posve mpacs on he Ngeran sock marke n he shor run as agans her long-run values (see Table 3), whle he lag value of CRR and BMS have posve mpacs on he Ngeran sock marke n he shor run and n he long-run gve her values. Ths mples ha any flucuaons n cash reserve rao and money supply wll be havng drec mpac on sock marke and on overall economy of he naon. The lag value of TBR s posve n long run and negave n shor run gven he ECM values. In mos counres, here s an nverse relaonshp beween sock marke performance and he neres raes for bonds and reasury blls. When one rses, he oher falls. When one falls, he oher rses. Ineres raes can have boh posve and negave effecs on Ngera socks hs depend on he ndcaors. As neres raes rse, bond prces wll declne, marke value wll flucuae based on changes n he neres rae. If he requred reurn rses, he sock prce wll fall, and vce versa whle, exchange rae volaly s found o have a posve mpac on Marke capalsaon n he shor run. The resul ndcaes ha he long run overall model s well fed as he ndependen 2 varables explaned 70 % Adjused squared ( R ) movemen n he dependen varable, whle he Breusch-Godfrey LM second order es for auocorrelaon shows he presence of weak seral correlaon beween he error erms. From he resul d* s less han 2, ha s < 2 for he BG es, herefore we rejec he null hypohess (H 0), whch says ha here s no posve auocorrelaon of he errors erms; we accep he alernave hypohess (H 1), whch says ha here s weak posve auocorrelaon of he errors erms. The effcency of he model wll no be affeced gven he weak naure of he posve seral correlaon. 7 Concluson Ths man objecve of hs sudy s o emprcally examne he relaonshp beween sock marke performances proxed by he growh of marke capalzaon n he Ngeran sock exchange marke. The prmary movaon for hs sudy s o enable polcy makers undersand he growng need o formulae moneary polces ha wll be responsve o changes n sock prces, snce he sock marke s a verable source of long-erm capal. The effecveness of moneary polcy should herefore be anchored on he poency of s nsrumens on he growh of he sock marke. The sudy employ a Dynamc Weghed Leas Squares (DWLS) o analyss he naure of hs mpac for boh long run and shor run whch s run over a me seres daa ha spanned from The analyss sars wh examnng sochasc characerscs of each me seres by esng her saonary usng he ADF-Fsher Ch-square un roo es o deermnaon he order of negraon and usng he Engle-Granger sngle-equaon o es for he conegraon and esmae error correcon mechansm. The analyss of he me

20 102 Ernes Smeon Odor and Isaac Chn. Nwaogwugwu seres properes of he daa employed revealed ha mos of he seres were negraed of order one. The resul shows ha mos of he varables are sascally sgnfcan n he shor erm excep for lqudy rao and exchange rae. The resul of ECM shows ha he lag value of MPR, EXR, LQR and DCC have posve mpacs on he Ngeran sock marke n he shor run as agans her long-run values, whle he lag value of CRR and BMS have posve mpacs on he Ngeran sock marke n he shor run and n he long-run gve her values. Ths mples ha any flucuaons n cash reserve rao and money supply wll be havng drec mpac on sock marke and on overall economy of he naon. The lag value of TBR s posve n long run and negave n shor run gven he ECM values. The sudy found ou ha moneary polcy nsrumens such as moneary polcy rae, reasury blls, drec cred conrol and broad money supply moneary nsrumens have long and shor run relaonshp wh sock marke performance measured by growh of marke capalzaon. The hgh mpacs of hese moneary nsrumens boh n long and shor run, mples ha hose varables have grea effec (posvely or negavely) on he Ngeran sock marke. The paper concludes ha moneary polcy s effecve n achevng he sably n he sock marke hrough he moneary nsrumens. Fndngs are conssen wh he hypohess ha he moneary nsrumens have a sgnfcan effec n achevng he mprovemen parcularly on sock marke ndex. 8 Polcy Implcaon and Recommendaons Our sudy shows ha moneary polcy s a sgnfcan deermnan of long-run sock marke effcency n Ngera. In oher words, long-run behavour of sock marke reurns n Ngera s nfluenced largely by moneary nsrumens varables. Specfcally, hgh moneary polcy rae and hgh Treasury bll rae reduces sock marke reurns ndcang ha moneary polcy effors have been o slow down he economy. A hgh neres rae aracs more savngs and dscourages he flow of capal o he sock markes leadng nvesors o demand for a hgher rsk premum whch mpedes nvesmen and slows down economc developmen. Whereas a low neres rae encourages hgher capal flows o he sock marke n expecaon for a hgher rae of reurn. The sudy also revealed ha drec cred conrol and broad money supply and cash reserve rao were rghly sgned wh sock marke capalzaon boh n he long and shor run and have hgh posve effec on sock marke performance, whle lqudy rao and exchange rae seem o be less sgnfcan or her mpacs are less fel n he sock marke reurns. In Ngera, he level of money supply has been on he ncrease over he years, mplyng ha snce money supply has negave relaonshp wh neres raes, hen sock prces would be expeced o grow wh he level of money supply. Also, neres raes and nflaon are expeced o have a negave mpac on sock prces. The exsence of such a relaonshp has mporan mplcaons for boh sock marke parcpans and cenral bankers snce, wh respec o he former hs ssue relaes o he broader opc of sock prce deermnaon and porfolo formaon, whle he laer are neresed n wheher moneary polcy acons are ransmed hrough fnancal markes. Economss generally agree ha resrcve moneary polcy leads o lower sock prces. On he oher hand expansonary moneary polcy leads o hgher sock prces. Some researchers also argue ha changes n moneary polcy nfluence forecass of marke deermned neres raes, equy cos of capal, and expecaons of corporae profably (Waud, 1970). The