MONETARY POLICY1AND STOCK MARKET1PERFORMANCE IN NIGERIA- EVIDENCE1FROM MARKET CAPITALIZATION

Abstract

This study investigated the relationship¹between monetary¹policy and stock market performance in Nigeria, with market¹capitalization serving as the primary measure of market¹ performance. Using a time-series research design, data spanning from 1981–2023 were analyzed, incorporating interest rate, inflation rate, and money supply as explanatory variables. Analytical methods include unit root tests, vector autoregressive¹ (VAR) estimation, impulse¹ response analysis, and Johansen co-integration tests. Results revealed that market capitalization exhibits strong sensitivity to its own innovations, with inflation shocks eliciting immediate but benign effects on market stability. Interest rate shocks showed a slight upward influence on market capitalization, suggesting no detrimental impact. Conversely, shocks to the money supply exert significant negative implications on market capitalization, as investors pivot to higher-yielding monetary assets, thereby reducing capital market participation. The Johansen co-integration test confirms long-term relationships between monetary policy variables and market capitalization. Regression diagnostics validate the model's robustness, free from issues like serial correlation or heteroscedasticity, while stability tests affirm the consistency of model parameters. The study underscores the pivotal role of monetary policy in shaping stock market outcomes. Recommendations include reducing borrowing costs to stimulate market activity, stabilizing the money supply to align with economic demands, and mitigating exchange rate volatility to bolster investor confidence. These measures are critical in navigating Nigeria's economic challenges, especially in the post-COVID era, where monetary interventions must be precisely calibrated to ensure sustainable market growth and resilience.