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Advances in Social Sciences Research Journal – Vol. 8, No. 2

Publication Date: February 25, 2021

DOI:10.14738/assrj.82.9406.

Adeleke, O. K., & Oyeleke, O. J. (2021). Asymmetric Effect of Fiscal and Monetary Policies on The Stock Market Performance In Nigeria

Advances in Social Sciences Research Journal, 8(2) 39-53

Asymmetric Effect of Fiscal and Monetary Policies on The Stock

Market Performance In Nigeria

Oluwayemisi Kadijat Adeleke

Department of Economics, Redeemer’s University,

P. M. B. 230, Ede, Osun State, Nigeria

Olusola Joel Oyeleke

Department of Economics, Redeemer’s University,

P. M. B. 230, Ede, Osun State, Nigeria

ABSTRACT

This study investigated the asymmetric effect of fiscal and monetary

policies on stock market performance from 2000:q1-2018q3 in

Nigeria. The study used Auto Regressive Distributed Lag (ARDL)

Bounds Test technique of cointegration to determine the equilibrium

relationship among the series. After the long run relationship has been

established, Vector Error Correction Model was used to analyse the

data. The results showed that only anticipated fiscal policy had a

negative and significant effect on the stock market performance in the

third and fourth quarters of the year. In contrast, anticipated and

unanticipated monetary policy as well as unanticipated fiscal policy

did not exert effect on stock market performance in Nigeria.

Government in Nigeria should reduce its expenditure which has the

capacity to negatively influence the performance of stock market in

Nigeria.

Keywords: asymmetry, fiscal policy, monetary policy, performance

INTRODUCTION

Stock market is a distribution vehicle and also acts as an intermediary between the savers and

users of funds in an economy. Stock market basically aids the transfer of funds from surplus units

to deficit units to ensure the effective and efficient allocation of scarce financial resources, thereby

creating an avenue for investors to participate in the economy for investment purposes (Osahon &

Oriakhi, 2013). Therefore, stock market performance gauged by volume of transactions (VOT)

executes key roles in the growth and development of an economy, and, therefore, cannot be

ignored. Stock market performance also plays central roles across the economies of the world by

acting as transmission mechanism in facilitating the mobilisation of savings from developed

economies to underdeveloped countries (Joshi & Giri, 2015).

However, fluctuations in the VOT through stock prices have significant effects on macroeconomic

variables as they affect investment and consumption decisions of both firms and households

(Faiza, Yasir, Farhan, Kamran & Saba, 2012). In the literature, there are three identified ways

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Advances in Social Sciences Research Journal (ASSRJ) Vol.8, Issue 2, Febraury-2021

shocks to stock prices affect the economy; first, shocks to stock prices are responsible for

variations to private investment in an economy because firms find it difficult to raise finance on

the stock market. Second, shocks to share prices cause deviations to firms’ balance sheets. Lastly,

variations to stock prices affect household’s wealth which have implications on household

consumption. This equally affects the liquidity demand of the household, being directly related to

the amount of financial wealth that the household holds (Joshi & Giri, 2015; Mbanga & Darrat,

2016). Therefore, an efficient stock market with relatively stable VOT via stock prices enhances

the wealth of investors and grows the economic activities of a nation while inefficient stock

market hinders the growth and development of an economy (Mishkin, 2001).

Specifically, in Nigeria, the spiral effects of shocks to the stock prices can be seen in the case of the

Nigerian Stock Exchange (NSE) which had been experiencing steady growth prior to the global

financial recession between 2008/2009. During this financial recession, NSE witnessed a

downturn in VOT, a development that had spill over effects on all sectors of the Nigerian economy.

For instance, the growth rate of the NSE all-share index in Nigeria in 2006 was 37.8% and there

was upward movement to 73.56% in 2007, making the NSE one of the most performing stock

exchanges in Africa (NSE, 2007). During the global financial crisis which started early 2008 and

was already at its peak in the month of April the same year, the Nigerian stock market witnessed a

sharp drop as the growth rate of the all share index declined to 45.8% from 73.56% (Lawal et al

2017). The crisis led to dumping of shares by foreign and domestic investors which further

depressed the stock market. As a result of shortage in capital inflow and foreign portfolio

investment withdrawal, financial withholdings became the norm. In spite of several reforms by

the regulatory authority, stock market performance has still been sub-optimal compared to its

pre-2008 level.

After 2008/2009 financial recession, while stock markets in developed economies such as UK and

US have shown an impressive recovery, Nigerian stock market’s performance has not been

remarkable. Although, the development has been blamed on a combination of regulatory

weaknesses, political meddling and capacity inadequacy amongst operators. Therefore, from 2008

till date authorities (both monetary and fiscal) in Nigeria have employed mixed of fiscal and

monetary policies to ensure incredible stock market performance. Several policies which have

been implemented to revamp the stock market, among others, include the frequent reviewing of

the monetary policy rate24, disbursement of bailout to the states of the federation, direct

intervention in the banking sector25 and risk management principles. However, it is pertinent to

note that while some of these policies are anticipated, some are not. On this ground, this study

intends to investigate which of the policies (anticipated versus unanticipated) implemented by the

government has impacted on the performance of the Nigerian stock market.

24 The Monetary Policy Rate (MPR) affects both the banking public as interest rates on deposits and loans affect the cost of

money and the economy because it naturally affects interest rates on both sides which has a spill over effect on the stock

market.

25 Direct intervention by the Central Bank of Nigeria to support the liquidity of banks in Nigeria.

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Adeleke, O. K., & Oyeleke, O. J. (2021). Asymmetric Effect of Fiscal and Monetary Policies on The Stock Market Performance In Nigeria Advances in Social

Sciences Research Journal, 8(2) 39-53.

URL: http://dx.doi.org/10.14738/assrj.82.9406. 41

LITERATURE REVIEW

Studies have not considered investigating the effect of anticipated and unanticipated of monetary

and fiscal policies on stock market performance so important. Therefore, more attentions are

diverted to examining the relationship between government policies (both monetary and fiscal)

and stock market performance in economies around the world, dwelling majorly on causal-effect

nexus. For instance, Anghelache, Jakova and Oanea (2016) analysed the causality between fiscal

policy and capital market performance in six European countries, using quarterly data from 2004

to 2015. The study found bidirectional causality for Czech Republic and Slovakia, unidirectional

for Bulgaria and Poland and indecisive for Hungary and Romania. Abakah and Poku (2016)

explored the causality between real budget deficits and the real stock market returns in Ghana

using monthly data from 2008 to 2015. In a VAR framework, the results showed that causality ran

from budget deficit to stock market in the economy of Ghana. Onyema (2017) investigated the

stock market reaction to fiscal policy shocks in Nigeria using the SVAR method. The study found

that stock prices insignificantly responded positively to fiscal policy shocks in Nigeria.

Similarly, Joshi and Giri (2015) examined the impact of fiscal deficits on the performance of stock

market in India, using annual data from 1988-2012. Using ARDL bounds test and VECM, the

results showed a long run relationship between budget deficit and stock prices but no substantial

effect in the short run. In another development, Rangan, Charl & Kanyane (2013) surveyed the

interplay of fiscal policy and asset prices with quarterly data from 1966 to 2012. Using time

varying parameter VAR, the study found that fiscal shocks were associated with increase in stock

prices. Osahon & Oriakhi (2013) investigated the effects of fiscal deficits on stock prices in Nigeria

using annual data from 1984-2010. Error correction technique of estimation provided the results

that fiscal deficit had a negative relation with stock prices. Using South Africa quarterly dataset

from 1966-2011 with Bayesian VAR, Goodness et al (2012) explored the association between

fiscal policy and asset prices. The outcomes showed that deficit exerted positive effects on stock

prices, particularly in the short-term.

Lawal et al (2017) examined the relations between monetary and fiscal policies on stock market

performance as well as the effect of volatility on the Nigerian stock market using the EGARCH and

ARDL methods. The study found that association between the two policies influenced stock

market returns in Nigeria. Nwaogwugwa (2018) investigated the linkage between macroeconomic

policy and stock market behaviour in Nigeria, using the ARDL bounds testing approach. The

outcomes showed that, both in the long-term and short-term, interest rate, money supply, public

spending and revenue influenced stock market. Hu et al (2018) probed the effect of Chinese fiscal

and monetary policy shocks on stock markets. The study discovered that both policies have

positive significant effect on stock market development. Mbanga and Darrat (2016) explored the

long and short run effects of fiscal and monetary policies on US stock returns using ECM. The

outcomes showed that fiscal policy was a major driver, both in the long and short run, stock

market.

In another development, Faiza, Yasir, Farhan, Kamran and Saba (2012) examine the relationship

between budget deficits and stock prices in Pakistan using yearly data from 1990 to 2010. The

results indicated that high developmental expenditure in Pakistan was the reason for long term

positive causal relationship between budget deficit and stock prices and in India a long term

negative relationship was observed due to high recurrent expenditure. Agnello and Sousa (2011)