IMPACT OF CENTRAL BANK COMMUNICATIONS ON STOCK PRICES IN NIGERIA

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IMPACT OF CENTRAL BANK COMMUNICATIONS ON STOCK PRICES IN NIGERIA

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. Our findings also suggest that CBN is transparent and credible. The study recommends that CBN should cautiously use communication as viable tool of monetary policy to coordinate agents’ expectations and as a tool of managing stock price volatility in the Nigerian Stock market.

IMPACT OF CENTRAL BANK COMMUNICATIONS ON STOCK PRICES IN NIGERIA

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