Impact of Central Bank Communications on Stock Prices in Nigeria

Description

– Impact of Central Bank Communications on Stock Prices in Nigeria –

Download Impact of Central Bank Communications on Stock Prices in Nigeria. Economics students who are writing their projects can get this material to aid their research work.

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.

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.

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