Impact of Central Bank Communications on Stock Prices in Nigeria
Impact of Central Bank Communications on Stock Prices in Nigeria.
ABSTRACT
A significant transition towards greater Central Bank transparency occurred in the last two decades. As a result, a number of Central Banks both in advanced and advancing economies communicate most aspect of their monetary policy with the aim of influencing agents’ decision for the effectiveness of monetary policy actions.
It is however noted that the signals inherent in Central Bank communication instead of coordinating agents’ expectation towards fundamentals, it sometimes coordinate it away. This study assessed the impact of communication by Central Bank of Nigeria (CBN) on stock prices in the Nigerian stock market from 2007 to 2011.
Five day weekly data on the Nigerian Stock Exchange (NSE) All Share Index (ASI) from January 4th, 2007 to June 30th 2011 and Banking 10 Index(BINDEX) from February 2nd, 2009 to December 31st 2010 were collected and used for the study.
The econometric tool of analysis used was the Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH) model. It was found that CBN’s communication has significant impact on stock prices in Nigeria and as well reduces volatility in the Nigerian stock market.
Our findings also suggest that CBN is transparent and credible. The study recommends that CBN should cautiously use communication as viable tool of monetary policy to coordinate agents’ expectations and as a tool of managing stock price volatility in the Nigerian Stock market.
TABLE OF CONTENTS
Title page………i
Declaration………ii
Certification……..iii
Acknowledgements……..iv
Abstract…………….v
List of Tables………….x
List of Figures………….xi
Acronyms………….xiii
Chapter One: Introduction
1.1 Background of the Study…….1
1.2 Statement of the Problem………3
1.3 Research Questions………………5
1.4 Objectives of the Study……..5
1.5 Research Hypotheses…………..6
1.6 Significance of the Study……….6
1.7 Scope of the Study………………7
1.8 Organization of the Study..……… …..7
Chapter Two: Review of Literature
2.1 Introduction…………….9
2.2 Conceptual and Measurement Issues……….9
2.2.1 Central Bank Transparency……………….9
2.2.2 Central Bank Credibility………….10
2.2.3 Central Bank Communication……………11
2.2.4 NSE Indices…………………….14
2.3 Theoretical Literature Review…….17
2.3.1 Monetary Policy and Expectation…18
2.3.2 Monetary Policy and Communication…..19
2.3.3 Monetary Policy, Central Bank Communication and Stock Prices….23
2.4 Theoretical Models for Stock Price Valuation……25
2.4.1 Discounted Cash Flow Model (DCF)…… …..25
2.4.2 Capital Asset Pricing Model (CAPM)… …….27
2.5 Empirical Literature………………32
2.5.1 Monetary Policy and Stock Prices …………33
2.5.2 Central Bank Communication and Stock Prices..35
Chapter Three: Research Methodology
3.1 Theoretical Framework…………….40
3.2 Analytical Framework and the Models………40
3.3 Model Specification…………46
3.3.1 EGARCH Model…………..46
3.4 Types and Sources of Data……47
Chapter Four: Presentation, Analysis and Interpretation of Results
4.1 Introduction……….50
4.2 Events in the Nigerian Stock Exchange..50
4.3 Stochastic Properties of the data………52
4.3.1 Line Graphs…….52
4.4 Unit Root Test………..53
4.5 Modeling Volatility of the Series……..55
4.5.1 Descriptive Statistics on the Series…55
4.5.2 EGARCH Estimation…………57
4.6 Model Selection Criteria Used…..61
4.7 Transparency Result……..61
4.8 Test of Hypotheses……………..63
Chapter Five: Summary, Conclusion and Recommendations
5.1 Summary of Findings… …………66
5.2 Conclusion……………67
5.3 Recommendations………………68
5.4 Suggestions for Further studies………….69
References ……………71
Appendices…………………….76
INTRODUCTION
The practice of Central Banking and the act of monetary policy in Nigeria has being evolving. The Central Bank of Nigeria (CBN) practiced different monetary policy regimes since its establishment in 1959.
The various regimes adopted ranges from the exchange rate targeting regime between 1959 – 1973, monetary targeting regime from 1974 to date, which involves direct monetary control (1974 – 1992) and indirect control 1993 to date (Egbuna, 2008).
To achieve the objectives of monetary policy, various tools are employed. Over the recent past, communication policy has become an important instrument of monetary policy globally.
The recognition of the effects of information asymmetries and uncertainties in financial variables has led Central Banks to attach greater weight to communication policy as an instrument of monetary policy.
Also, there is wide consensus among academics and policy makers that monetary policy operates mainly via private agent’s expectations. The widespread influence of the New Keynesian model is said to underpin the focus on expectations.
Instead of presuming a close alignment between the monetary authority and the private agents as in the case of rational expectations hypothesis, the focus is now on how the alignment could be brought about in practice via Central Bank efforts.
REFERENCES
Adekunle, P.A. (2010), “Impact of Banking Sector Reforms on the Nigerian Capital Market,” CBN Bullion, Volume 34, No.4, October-December, 2010.
Ajayi, M. (2007), “Monetary Policy Transmission Mechanism in Nigeria,” CBN Economic and Financial Review, Volume 45/4, December, 2007.
Amato, J.D., Morris, S., and Shin, H.S. (2003), “Communication and Monetary Policy,” Cowles Foundation Discussion paper No. 1405.
Anyawu, J.C. and Oiakhenan, H.E., (1995), “Modern Macroeconomics: Theory and Applications in Nigeria,” Onitsha, Joanee Education Publishers Limited.
Arduino, C. (2002), “Capital Asset Pricing Model and Arbitrage Pricing Theory in Italian Stock Market: An Empirical Study,” Edinburgh, Management School of Business and Economics, CFMR/02.01. (http://hdl.handle.net/1842/1821).
Begg (2006), “Economic Policy and Institutional Transparency: The European Central Bank,” European Institute, London School of Economics and Political Science.
CSN Team.
