Macroeconomic Dynamics and Stock Market Return Volatility in Nigeria

ABSTRACT

The contribution of the stock market to domestic resource mobilization and investment directions in modern economies is far-reaching and has increased in recent years. Thus, a stable and asymptotically-adjusting stock market is predicated on a more predictable and stable stock returns regime over considerable periods. The relationship between selected macroeconomic variables and stock returns volatility in Nigeria was empirically examined in this study. The goal is to highlight how the six selected macroeconomic variables provide additional mechanism for risks in the stock returns as well as contribute to inefficiency of the stock market in Nigeria. Annual data used cover the period 1985 to 2021, while a dynamic framework is devised for the study. This involved the application of the Exponential Generalised Autoregressive Conditional Heteroskedasticity technique to estimate volatility in stock returns and observe the properties of stock returns volatility, and the Autoregressive Distributed Lags technique was to demonstrate long run and short run effects of the macroeconomic variables on stock returns volatility in Nigeria. The study finds evidence that macroeconomic variables exert both short-term and longterm effects on volatility in stock returns in Nigeria. In particular, it is found that the short-run impact of macroeconomic variables on stock returns is stronger than the long run impacts and that macroeconomic variables have a strong dynamic impact on stock return volatility in Nigeria, with the short run and long run impacts differing slightly. Moreover, industrial production and money supply are found to be the most macroeconomic factors in dampening stock return volatility, while inflation rate is found to be the strongest factor in stimulating returns volatility. The results imply that policies aimed at addressing efficiency and stability in the stock market need to focus more on ensuring improved productive capacity and overall macroeconomic stability in Nigeria. Moreover, monetary policy is shown to be highly effective in ensuring efficiency in the stock market in Nigeria.