Macroeconomic Variables And Stock Market Returns Volatility in Nigeria

ABSTRACT

GARCH (1, 1) and the E- GARCH (p, q) techniques were used in this study to evaluate the volatility clustering in the stock market returns. Interest rates, inflation rates and exchange rates were themacroeconomic determinantfactors to stock market returns volatility in Nigeria, covering the period, 1995 to 2014. The study revealed that inflation, interest rates and exchange rates were volatile and move in clusters, with the following valuesof GARCH coefficient β 0.966349, 0.9662 and 0.764638 respectively, with p-values significant at 1% level. The research also showed that interest rate has a negative relationship with stock market returns, with a correlation coefficient of –0.5531,while inflation and exchange rates have a positive relationship with stock market returns, with correlation coefficients of 0.6872 and 0.6161 respectively. There is high and persistent volatility in the stock market returns, based on the values of the α 0.460889 and β 0.682731coefficients.Interest rates, inflation rates and exchange rate exerted significant impact on the stock market returns volatility in Nigeria, at 1% level of significance. Models developed in this study should be employed by the regulatory authorities to make polices that will minimize volatility, by keeping interest rates low thereby stabilizing exchange rate and managing inflation within the single digit range, to minimize stock market returns volatility in Nigeria.