Impact of the Volatility of Macroeconomic Variables on the Volatility of Stock Market Returns
This chapter investigates the relationship between volatility of macroeconomic variables and the volatility of Nigeria’s stock market returns using annual data from 1985-2009. The Macroeconomic variables used are: inflation rate, government expenditure, foreign exchange rate, index of manufacturing output, broad money supply, and minimum rediscount rate. In pursuance of this, the AR(1)-GARCH-X(1,1) model was used for the analysis. The findings of this study revealed that, Nigeria’s current stock market return is positively influenced by previous returns. Volatility of Nigeria’s stock market returns was affected by past volatility less than the related news from the previous period. Also, the result shows that there is a significantly positive relationship between the volatility of the Nigeria’s stock market returns and the short run deviations of the macroeconomic variables (macroeconomic factors volatility) in the system. The results provide some insight to investors, financial regulators, and policymakers in the Nigeria’s stock market when structuring their portfolios and formulating economic and financial policies.