Effect of Monetary Policy on Stock Market Liquidity in Nigeria

Effect of Monetary Policy on Stock Market Liquidity in Nigeria

ABSTRACT

This istudy iexplores ithe ieffect iof imonetary ipolicy ion istock imarket iliquidity iin iNigeria.The objective of the study is to find out how monetary policy affects stock market liquidity in the Nigerian economy either positively and negatively. Data for this study were collected through primary and secondary data gathering sources. Data was analysedusing responses received using questionnaire which was designed in a yes or no format.iChisquare iwas iused ito imeasure ithe idiscrepancies iexisting ibetween ithe iobserved iand iexpected ifrequency ivalues iand ito ialso iprove ithe ilevel iof isignificance iin itesting ithe istated ihypotheses iof ithe istudy. The Statistical Package for Social Sciences (SPSS) was employed for the analysis. The data collected from the respondents regarding the study collected data from CBN statistical bulletin from 013 to 2016. The result found that there was a significant relationship between monetary policy and GDP. Findings of the study reveal significant impact of monetary policy on the Nigerian economy. However, monetary policy show no significant effect on stock market liquidity. Moreover, no significant positive but high negative effect was observed between monetary policy and population growth in Nigeria. It is therefore recommended that policy formulators such as the CBN should strive to improve on the monetary policy guidelines aimed at enhancing market liquidity for the overall benefit of the entire Nigeria populace.

 

 

Keywords:

Monetary Policy, Stock Market Liquidity, Gross Domestic Product (GDP), Nigeria CHAPTERiI

INTRODUCTION

1.1iBackgrounditoitheiStudy

Theistockimarketiisiaipublicicorporateimarketiiniwhichipartnershipsiandiindividualsidealingi inistockipurchaseiandisellioniaistockitradeioveritheicounter.Theifinancialiexchangeicanibeip erceivediinitwoidifferentiways:itheiprimaryimarketiisitheiplaceiorganizationsifloatitheirioffer sitoitheipeopleidependentionitheifirstisaleiofistockitoiimproveicapitali(initialipubliciofferingi toiimproveicapital).iTheisecondaryimarketiisitheiplaceiwhereioneiinvestoripurchasesisharesif romianotheriinvestoriatitheiongoingipriceioridependentionitheicostibothitheibuyerianditheisel leriagree.iHowever,ithisilawibasediauthorityicontrolsitheisecondaryimarket.iStockimarketsiar eiveryisignificantiasiitiservesitwoikeyipurposes:itoiprovideitheiorganizationiwithiassetsiforib usinessiexpansion.iForiinstance,iifiaicompanyifloatsioneimillionisharesiofistockithatiwereiini tiallyifori10idollarsiaishare,ithenitheicompanyiwillihaveiinireturni10imillionicapitalithaticani beiuseditoiextenditheibusinessiinsteadiofiborrowingitherebyiavoidingiincurringidebtiandiinte resticharges.iTheisecondaryiintentioniisitoiempoweriinvestorsitoihaveitheiopportunityitoipart akeiinitheipubliclyitradedistockibenefit.iAistockimarketiisiviewediasiaifluidimarketiwheniiti has,ivariousibuyingiandisellingiordersiatidifferenticosts,itheiexpensesiofitransactionsiisimini maliandivalueiunpredictabilityiisilimited.iLiquidityiisiaimultidimensionaliideaithatiisifrequen tlyievaluatedioricalculatedibyivariousiintermediariesiinivariousifinancialimarkets.

(iSarriandilybek,

2002)iarguediforifiveicomponentsiofiliquidity:itightnessi(looksiforiprocessingicostsiandiothe riintrinsicitradingicosts),iimmediacyi(efficiencyiiniorderisettlement),idepthi(existenceiofiailar geinumberiofiordersibothiaboveiandibelowitheipresentitradingipride), breadth (means that orders are both numerous and largein volume with minimal impact on prices), resiliency (it is a characteristic of markets in which neworders flow quickly to correctorder imbalances,

which       tend       to       move       prices       away       from       what       is      wrranted       by

fundamentals.iHowever,itheseimeasurementsioftenioverlapianditheitechniquesiuseditoicaptur eithemiinitheiempiricaliliteratureisometimesicalculateioneiwithitheiassistanceiofianotheriorii nitheipresenceiofianotherifactor.iTherefore,itheiinfluenceiofianyisingleiliquidityifactoriisireg ularlyielusiveialthoughiitiisianiimportanticonsiderationiinitheifinancialimarketianalysisiandia ssetipricing.iTheiexecutioniofitheirequestiasiwelliasitheiexecutionipriceiisiuncertainiwhereili quidityiisiuncertain;itheiinvestorsiwouldiunderisuchiuncertaintyiguaranteeiaipremiumiforitak ingitheirisk,icommonlyireferreditoiinifinancialiliteratureiasiailiquidityipremium.   (Ihemeje and Anumadu, 2016) defined monetary policy as the combination of measures designed to regulate the value, supply and cost of money in an economy in consonance with the level of

economic                                                                                                                        activities.

iMonetaryipolicyiinvolvesimanagingitheimoneyisupplyiandiinterestiratesiaimediatiachievingi macroeconomiciobjectivesisuchiasiinflationicontrol,iproductivity,iliquidity,iandiconsumption

.iiLiquidityirevealsihowibigitheitradeoffsibetweenitheispeediofitheisaleiandipriceistocksicanibeisoldifor.

MonetaryiPolicyiisireferreditoiasitheistrategyiadoptedibyitheimonetaryiauthorityiofiainationi whichicontrolsieitheritheiloanifeeipayableioniveryishorttermiborrowingioritheimoneyisupply,ioftenifocusingioniinflationioritheiinterestirateitoiguara nteeivalueistabilityiandigeneralitrustiinitheicurrency,iexchangeirate,iandiadjustitheinumberiof imoneyibanksiareirequireditoimaintainiasireserves.iii

Theiprimaryiobjectiveiofimonetaryipolicyiisitoisecureiprizesiandiadequateijobsithatiwilliallo wiforiaistableimacroeconomiciconditioniforifinancialisuccess.iPromotingipoliciesiwilliboosti economicigrowthiandimustibeiaccomplishediifimonetaryipolicyiisiproperlyitransmitteditoidif ferentichannelsisuchiasitheiinterestirateichannel,icreditichannelianditheipriceileveliisiveryiim portantiforimonetaryipolicymakers.iIniseveralistudies,isomeifactorsihaveibeeniidentifiediasii nfluencingitheidemandiandisupplyiofistock.iTheseifactorsiincludeitheicreationiofiassets,idivi dends,igovernmentirulesiandiregulations,iinflation,iinvestoribehaviour,imarketiconditions,ian diunregulatediregulariorienvironmentaliconditionsiinfluencingitheiorganizationsiproduction.i Monetaryiauthoritiesihaveiusedidifferentiinstrumentsitoiinfluenceipolicyionitheivariousichan nelsiofitransmission.iMonetaryipolicyicanibeidirectioriindirect.iItiisiindirectiwheniitiusesima rketdetermineditoolsisuchiasiopenimarketioperation,ivariableirediscountirate,iandireserveirequire ments.itiisidirectiwhenitargetingitheiportfolioioriaccountingireportsiofibanksiinitheifinanciali frameworkiutilizingisecuritiesiforistabilization,iselectiveicrediticontrol,iandicontrollediinteres tirates.

The transmission of monetary policy refers to how changes to the cash rate affects economic activity and inflation. When the reserve bacnk loweers the cash rate, this causes other interest rates in the economy to fall. Lower interest rates stimulates spending (Atkin and Gianna, 2017).

Structural Adjustment Program (SAP) is set of economic reforms that a country must adhere to in order to secure a loan from the International Monetary Fund (IMF), SAP are often a set of economic policies, including reducing government spending, opening to free trade (Halton, 2019).

iAisignificantichangeiinitheiformulationiofimonetaryipolicyiiniNigeriaihasigoneiaheadionith eiimpactiofiSAPi(SystemiApplicationiandiProductsiiniDataiProcessing)iasiaimeasureitoichan geitheifinancialisystemiandieventuallyiopenitheicapitalimarketitoiforeigniparticipation.iEcon omiesicanibeidrivenibyiproduction,iinitheieventithatiaigreateriamountiofiitibecomesiavailabl eithenitheichancesiforigrowthiincrease.iIfifeweriactionsitakeiplace,iproductionilevelsidrastica llyidecreaseiandiiticouldibeiailongiwhileibeforeitheyicanireestablishithemselvesitoipreviousilevels.I

 

1.2iStatementiofiProblem

Theimonetaryipolicy’sikeyiobjectiveihasiremaineditoimaintainitheiinternaliandiexternalibalan ceiofipayments.iHowever,iavenuesiiniwhichitoiachieveithoseiobjectivesihaveicontinueditoich angeiacrossitheiyears.

iFromi2015itoi2018,itheimonitoryipolicy’sifocusiwasiinfluencedibyitheidevelopmentiinitheig lobaliandidomesticieconomicienvironment.iTheikeyichallengesithatileditoitheidevelopmentio fimonitoryipolicyionitheiglobalifrontiwere:itheigrowthiofiprotectionistsisentimentsiinimostio fitheimajoriandiemergingimarketieconomies,iincreaseiinimonitoringipoliciesiiniadvancedieco nomies,itheicontinuingiinstabilityiofiBREXITipolicy,itheiresumptioniofimonitoryipolicyinor malizationiwhichiaffecteditheiglobalicapitaliflow,itheidisorderlinessiofitheimovementioficom modityipriceianditepidirecoveryiinicrudeioiliprices.iTheseiassertedipressureionitheilocalieco nomicienvironment,iculminatingiinitheimanifestationiofiweakifiscalipositions,ilowireserveiac cretion,iandiaiforeigniexchangeimarketithreatenediwithiliquidity.iWhileiresearchersihaveipai disoimuchiattentionitoithisifieldiofistudy,iespeciallyihowistockimarketiperformanceiisirelate ditoimacroeconomicivariables,imonetaryipolicyivariablesiandihowiitiaffectsichangesiinistock imarketiliquidityihasireceivedilessiattention.iAsivariablesiuseditoidescribeitheirilongtermibalanceirelationship,iGrossiDomesticiProductiisiemployediasitheidependentivariableian dishares,imarketicapitalization,ianditurnoveriratiosiasivariablesiuseditoiexplainitheirilongruniequilibriumirelationship.iTheiresultiindicatedithatiaioneipercentiincreaseiinistockimarketi capitalizationicouldileaditoithirtythreeipercentiincreasesiinirealiGDP.iHence,ithisistudyiinvestigatesitheieffectiofimonitoryipol icyionistockimarketiliquidityiiniNigeriaifromi2015itoi2018.

 

1.3iObjectiveiofitheiStudy

Theiobjectiveiofitheistudyiisitoifindioutihowimonetaryipolicyiaffectsistockimarketiliquidityii nitheiNigerianieconomy,itheyiareiasifollows;

• Toifindioutihowimonetaryipolicyiaffectsitheieconomyipositivelyiandi
• Toifindioutihowimonetaryipolicyiaffectsitheieconomyithroughistockimarketi
• Toifigureioutihowitoifindiaisolutionitoitheiproblemsiofimonetaryipolicyionitheiecono my.

1.4:iResearchiQuestions

1)iiDoesimonetaryipolicyiaffectitheiNigerianieconomy?

2)iiDoesimonetaryipolicyionistockimarketiliquidityileaditoianiincreaseiinitheiNigerianiecono my?

3)iiDoesimonetaryipolicyionistockimarketiliquidityiaffectitheipopulationibothipositivelyiandi negatively?

1.5:iResearchiHypothesis

Theifollowingihypothesesihaveibeenidevelopediaroundiwhichithisiresearchiwouldiinvolve:

Hypothesisi1

H₀:iMonetaryipolicyionistockimarketiliquidityiwillinotihaveieffectsionitheieconomy.

H₁:iMonetaryipolicyionistockimarketiliquidityiwillihaveieffectsionitheieconomy.

Hypothesisi2

H₀:iMonetaryipolicyionistockimarketiliquidityiwillinotileaditoianiincreaseiinitheiNigerianiec onomy.

H_1iiiMonetaryipolicyionistockimarketiliquidityiwillileaditoianiincreaseiinitheiNigerianiecono my.

Hypothesisi3

H₀:iMonetaryipolicyionistockimarketiliquidityiwillinotiaffectitheipopulation H₁:iMonetaryipolicyionistockimarketiliquidityiwilliaffectitheipopulation.

1.6:iScopeiofitheiStudy

This research focuses on the effect of monetary policy on stock market liquidity in Nigeria, which requires a thorough analysis of Monetary Policy in Central area, Abuja. The period of the study covers form (2015 to 2018).

1.7:iSignificanceiofitheiStudy

Theidiscoveriesiofithisiinvestigationiwillibeiimportantitoitheigovernmentiinidecidingihowitoi improveitheimonetaryipolicyiofitheieconomy.iTheicitizensiwouldineeditoiknowiaboutimonet aryipolicyitoibeiableitoihelpiiniimprovingitheisocietyiinimanyiways.iTheistudyiisiimportanti asiitiwillicontributeitoitheibodyiofiliteratureiinithisiarea.

Effect of Monetary Policy on Stock Market Liquidity in Nigeria

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