Money Supply and Stock Prices – A Case Study of Nigeria
Dr. Ogbonna Udochukwu Godfrey
Department of Banking and Finance, College of Management and Social sciences Rhema University Aba, Nigeria
https://doi.org/10.47191/jefms/v4-i10-10ABSTRACT:
This study examined the relationship between money supply and stock prices, using E-view version 10. The empirical results of the Augmented Dickey Fuller (ADF) unit root test at 5 percent critical levels indicates that all the variables (M2 and MCAP) were not stationary at levels. However, all the variables became stationary after first differencing. Hence, the variables are of the same order of integration I (1). A cointegration test tells us that there exists a long run relationship between or among the variables and that they will not wander far apart away even though on the short run they exhibit random walk behavior. The Vector Error Correction test shows that Money supply (M2) has a significant relationship with market capitalization of the Nigerian stock exchange. The value of the Adjusted R-Squared of 0.726710 implies that Money supply (M2) explained about 72.67% systematic variations in the dependent variable (MCAP) over the observed years while the remaining 27.33% variations are explained by other determining variables outside the model. In order to further establish the relationship between money supply and stock market price, a granger causality test was carried out and it was established that there is a bi-directional causality between money supply and stock prices. The researcher therefore recommends that there should be collaboration among agencies of government in charge of money supply and stock exchange in order to make sure that sound policies are made to achieve the objective of government. Furthermore, that there should be a deliberate and concerted policy and effort to improve the Nigerian stock exchange market in line with other stock exchanges of the world, since stock prices cause money supply and vice versa.
KEYWORDS:
Stock prices, money supply, VECM
REFERENCES:
1) Gupta, M.C. 1974. “Money Supply and Stock Prices: A Probabilistic Approach”, Journal ofFinancial and Quantitative Analysis, 9(1): 57-68.
2) Hamburger M.J. and Kochin.L.A 1971. “Money and Stock Prices: The Channels of Influences.” The Journal of Finance, 27(2): 231-249. 59 JOURNAL FOR ECONOMIC EDUCATORS, 8(2), FALL 2008
3) Homa, K. E. and Dwight M. J. 1971. “The Supply of Money and Common Stock Prices.” The Journal of Finance, 26(5): 1045-1066.
4) Kraft, J.and Kraft. A. 1976. “Determinants of Common Stock Prices: A Time Series Analysis.” The Journal of Finance, 32(2): 417-425.
5) Pearce, D. K. and Roley. V.V 1985. “Stock Prices and Economic News.” The Journalof Business, 58(1): 49-67.
6) Pesando, James E. 1974. “The Supply of Money and Common Stock Prices: Further Observations on the Econometric Evidence.” The Journal of Finance, 29(3): 909-921.
7) Sprinkel, B. 1964. Money and Stock Prices. Homewood, Illinois: Richard Irwin, Inc.
8) Sellin, Peter(2001). "Monetary Policy and the Stock Market: Theory and Empirical Evidence." Journal of Economic Surveys 15.4, 491-54
9) Bernanke, B.S., and Kuttner K.N (2005). "What Explains the Stock Market's Reaction to Federal Reserve Policy?" Journal of Finance 60.3, 1221-57.
10) KING. B (1966). Market and industry factors in stock price behaviour. Journal of business, University of Chicago Press. Vol. 39. Page 139.
11) MUSÍLEK, P(1997). Změnymakroekonomickýchveličinaakciovékurzy. Finance a úvěr, 47, 1997, č.3.
12) BILSON, C. M., BRAILSFORD, T. J., HOOPER, V. J (2000). Selecting marcoeconomic variables as explanatory factors of emerging stocks market returns. The Australian national university: 2000. Working papers series in finance 00-04.
13) VESELÁ, J(2010). Českýkapitálovýtrhpohledemglobálnífundamentálníanalýzy. Sborníkpříspěvků z
mezinárodnív ědeckékonference „ Evropské finančnísystémy 2010“. Masarykovauniverzita Brno, 2010. ISBN 978-80-210-5182-9.
14) KOHOUT, P (2010). Investičnístrategie pro třetítisíciletí. 6. vyd. Praha: Grada Publishing ISBN: 978-80-247-3315-9.
15) MASKAY, B (2007). Analyzing the Effect of Change in Money Supply on Stock Prices, The Park Place Economist: 2007, Vol. 15.
16) SHOSTAK, F (2011). Making sense of money supply data.
http://www.wissensnavigator.com/documents/MoneySupplyShostak.pdf
17) POIRÉ N. P (2000). The money effect. Barron´s business and financial weekly magazine.
18) RAPACH, D. E., WOHAR, M. E. RANGVID, J (2005). Macro variables and international stock return predictability. International journal of forecasting.
19) PEARCE, D. K., ROLEY, V. V(1985). Stock prices and economic news. The journal of business, 58 (1).
20) Locke, John. (1692). Consequences of the Lowering of Interest and Raising the Value of Money.
21) Fisher I (1930). The theory of Interest. MacMillan
22) MAYSAMI, R. C. KOH, T. S (2000). A Vector Error Correction Model of the Singapore Stock Market. International Review of Economics and Finance.
23) FAMA, E. F (1981). Stock returns, real Activity, inflation and money. The American Economic review: 1981, 71(4): 45-565.
24) BRAHMASRENE, T. JIRANYAKUL, K (2007). Cointegration and causality between stock index and macroeconomic variables in a emerging markets. Academy of Acounting and Financial Studies Journal.
25) CAGLI, E., C., HALC, U., TASKIN, D (2010). Testing long run relationship between stock market and macroeconomic variables in the presence of structural breaks: The Turkish case. International research journal of finace and economics. Issue 48. ISSN: 1450- 2887.
26) SHAOPING, CH(2008) Positivist analysis on effect of monetary policy on stock price behaviors. Proceedings of 2008 conference on regional economy and sustainable development. ISBN 978-0-646-50352-3.
27) HABIBULLAH, M (1998) . Money, output, stock prices in Malaysia: Futher evidence. Borneo review, 1998.
28) HABIBULLAH, M., S. BAHARUMSHAH, A., Z (1996). Money, output and stock prices in Malaysia: an application of the cointegration test. [online]. International Economic Journal, volume 10, numer 2.
29) KIMURA, T. KORUZOMI.T (2003). Optimal monetary policy in a micro-founded model with parametr uncertainty. Finance and economics discussiom series, 2003. Board of Governors of the Federal Reserve System (U.S.).
30) HANOUSEK, J.and FILER, R. K (2000). The relationship between economic factors and equity markets in Central Europe. Economics of transition, 8 (3) 623-638.
31) HUSAIN, F., MAHMOOD, T (1999). Monetary expasion and stock returns in Pakistan. The Pakistan Development review, winte. s. 769 – 776.
32) FLANNERY, M. J., PROTOPAPADAKIS.A (2002). Macroeconomic factors do influence aggregate stock returns. The review of financial studies. Oxford: Oxford university press. p. 751 – 782
