SOURCE:

Faculty: Management Sciences
Department: Banking And Finance

CONTRIBUTORS:

Akani, W. H.
Ibenta, S. N. O.

ABSTRACT:

This study examined the effects of monetary policy transmission mechanism on capital market fundamentals in Nigeria (1981 – 2015). These transmission mechanisms include the interest rate, credit, exchange rate and asset pricing channels on capital market variables such as market capitalization and stock market liquidity. The main objective of this study was to ascertain the relationship between monetary policy transmission mechanism and the capital market fundamentals in Nigeria. Specifically, the study aimed to find out the effects of interest rate channel, credit channel, exchange rate channel and asset pricing on market capitalization and stock market liquidity. The study will also determine the causal relationship between monetary policy channels and the capital market fundamentals. The study used secondary data collected from the Central Bank of Nigeria Annual Statistical Bulletin and Stock Exchange Fact Book various issues. The study employed descriptive statistics and multiple regression models to estimate the relationship that exists between monetary transmission channels and capital market fundamentals. The descriptive statistics were used to examine fluctuations in the variables within the time period. The null Hypotheses (H0) were tested at 0.05 level of significance, Ordinary Least Square (OLS), Augmented Dickey Fuller Test, Johansen Co-integration test, normalized co-integrating equations, parsimonious vector error correction model and pair-wise causality tests were used to conduct the investigations and analysis. The empirical findings revealed that the level series (OLS) multiple regression results indicates that there may be some degree of time dependence in the level series results which could lead to spurious regression results, the unit root result (ADF) showed that the variables were stationary at the first difference of Order 1 (1). The co-integration tests revealed a long run dynamic relationship between the dependent and independent variables in the models. The parsimonious model summary shows that monetary policy transmission channels such as interest rate channel, credit channel, exchange rate channel and asset pricing channel explains a strong and positive significant relationship between the dependent and independent variables. However, the direction of causality between the monetary policy transmission channels and capital market fundamentals is mixed indicating uni and bi-directional causality. The study concluded that monetary policy transmission mechanisms (interest rate channel, credit rate channel, exchange rate channel and assets pricing channel) are important instruments of economic and sound financial system stabilization. It was also established in the study that the monetary policy transmission channels affected the capital market fundamentals significantly. The study therefore recommends for the strengthening of the interplay of monetary policy transmission mechanisms for the purpose of achieving monetary policy targets and sound financial sector stability in Nigerian in view of the observed nexus between monetary policy transmission channels and capital fundamentals.