FINANCIAL DEREGULATION, STOCK PRICE VOLATILITY AND MONETARY POLICY IN NIGERIA

ABSTRACT

Germane to every monetary policy is the goal of achieving price stability. The objective of price stability essentially encapsulates the need to eliminate price expectations to zero and to eliminate the long run uncertainty about the price level. The trend is interesting and indeed focused within the purview of two monetary frameworks – inflation targeting and monetary targeting extremes. The Nigerian CBN has been on both sides of this divide. In between this divide is found the income targeting frameworks and the Friedman-type policy rule which itself has been criticized for reasons of perceived instability in the demand for real money balances by monetary targeting advocates.

Consequently, the objective of this study is to determine whether inflation expectation and price volatility have any significant influence on inflation in Nigeria, and; ipso facto determine the extent to which monetary policy have eliminated expectations and volatility in the price level.

CHAPTER ONE

1.0 GENERAL DESCRIPTION OF STUDY

Germane to every monetary policy is the goal of achieving price stability. The objective of price stability essentially encapsulates the need to eliminate price expectations to zero and to eliminate the long run uncertainty about the price level. The trend is interesting and indeed focused within the purview of two monetary frameworks – inflation targeting and monetary targeting extremes. The Nigerian CBN has been on both sides of this divide. In between this divide is found the income targeting frameworks and the Friedman-type policy rule which itself has been criticized for reasons of perceived instability in the demand for real money balances by monetary targeting advocates.

Proponents of inflation targeting on the other hand are quick to point to the fact that monetary targeting is an ineffective strategy, because of the underlying core inflation, which accommodates persistent inflationary pressures, which are transmitted into inflation expectations.

While inflating expectation and long-run price volatility keeps generating interest, little in terms of studies and policy focus has been on these in Nigeria.

So far the studies on Nigeria’s inflation have been able to tell us that expectations in the price level have been tested under adaptive expectations whereas the assumptions for rational expectations of prices are considered to be too strong for prices. It is imperative therefore, to examine the ability of monetary policy at reducing forward-looking expectations to tolerable levels that are consistent with desired level of prices.

And more so, the concentration has been on the causes of inflation in Nigeria, where as the role of monetary in the context of Nigeria’s current framework is not shown to be capable of circumventing or eliminating distortions in the price level occasioned by uncertainty and forward-looking expectations.

The recent opening in emerging financial markets has generated a large literature, with many commentators predicting that such liberalization will increase the inflow of foreign capital, leading to greater financial development and economic growth. In principle, some models maintain that a market opening should decrease the variability of asset prices. The more able investors are to adjust the quality of their portfolios in response to shocks, the less impact there should be on prices, and hence the volatility of returns should fall (Reinhart 1998). However, the tumultuous events in developing countries over the last few years have led some practitioners and policy makers to question whether opening may in fact substantially raise the volatility of asset prices.

Moreover, several papers examining the behaviour of recently liberalized stock exchanges (Borenzstein and Gelos 2000), Froot, O’Connell and Seasholes 1999, and Kaminsky, Lyons and Schmukler 1999 have found strong evidence of herding, momentum trading, and trend chasing, all of which can substantially increase, rather than decrease the volatility of share prices.

There have been previous studies which have examined the effect of liberalization on stock volatility (Bekaert and Harvey 1997, Desantis and Imorohoroglu 1997), (Inclan, Aggarwal and Leal 1997), (Kim and Singal 2000), and (Levine and Servos 1998).

Monetary policy targeting in Nigeria is centered on a financial programming approach that contain an implicit inflation target and external reserves consistent with the growth of real economic activity and growth of money supply from which the economy’s absorptive capacity for domestic credit is derived. This study would therefore be a significant departure from the studies on inflation in Nigeria by incorporating forward-looking expectations and volatility effects of prices in determining the long direction of monetary policy action.

Consequently, the objective of this study is to determine whether inflation expectation and price volatility have any significant influence on inflation in Nigeria, and; ipso facto determine the extent to which monetary policy have eliminated expectations and volatility in the price level.

1.1 STATEMENT OF PROBLEM

Meanwhile, empirical studies on financial deregulation, stock price volatility and monetary policy in Nigeria is scanty, the new era of financial practices in success of financial sector is at the threshold.

Given the economic significance of this reforms and the low level research in this area, it is essential that meaningful research should be undertaken to discover the implication of this reforms in the financial practices with regards to monetary policy in Nigeria.

To address this issue empirically, the main focus of the study is to carry out an empirical research aimed at addressing the following questions:

(i) What is the implication of deregulation on the financial sector on the stock market price and monetary policy?

(ii) What is the consequence of internal and external inefficiencies that results from financial sector deregulation?

(iii) What is the nature of changes in monetary policy as it affects equity prices?

(iv) Why the changes in monetary policy affect stock prices?

1.2 OBJECTIVE OF THE STUDY

The main purpose of this study is to examine empirically the relationship between the banking reforms and consolidation and human resource management. Specially, the study will be designed to achieve the following objectives:

i To investigate the impact of monetary policy on the deregulation of Nigerian financial sector as it relates to stock price(s)

ii. To analyse the impact of reforms in the financial sector on the operational performance of this sector in Nigeria

iii. To determine the improvement in linkages between the formal and informal financial sector of the economy.

iv. To examine critically the performance of financial deregulation on stock price during pre and post implementation stages of these reforms

1.3 SIGNIFICANCE OF THE STUDY

It is hope that this study will be theoretically and practically significant.

The importance of this study will basically include:

Theoretically, it will contributes to the understanding of economists as well as other users of economic indicators on how monetary policy can be employed to deregulate the financial sector of the economy of Nigeria and its implication on stock prices

More so, the study would bridge the gap in the business environment as it relates to the study.

Practically, the result of the study is likely to be useful to ascertain effectiveness and other uses of financial deregulation through monetary policy measures. Also, it will ascertain the degree and nature of association that exists among the variables of the subject in question.

1.4 DELIMITATION AND LIMITATIONS OF THE STUDY

The study is limited in scope. The study will focus on Nigerian economy with its attending financial system review of 1976, 1986 and 2004 financial deregulation policy. These activities and volatility of stock price within this period would also be examined as well as the monetary policy measured during these periods.

Meanwhile another issue is the reluctancy of respondents to questionnaire, this is owing to what seems precious situation in the view of this new development.

Finally, it is hoped that despite these limitations, the findings from the study could find general application to the area of study and provide the building blocks for future researchers.

1.5 RESEARCH METHODOLOGY

In view of this, the only possible method of collecting the require information would be field studies with self-administered questionnaire that will be interested observing and recording how the variable of the study behave rather than manipulating them (Asika 1991).

1.6 RESEARCH QUESTIONS

(1) What is the relationship between the monetary policy and the reforms in the financial sector?

(2) What is the significance of monetary policy variable on the economy situation of Nigeria?

(3) What is the effect of financial sector reform on the stock price volatility and monetary policy in Nigeria?

(4) What relationship does monetary policy in Nigeria have with stock price(s)?

1.7 RESEARCH HYPOTHESIS

During the course of this study the following hypothesis would be tested:

HYPOTHESIS 1

Ho: The monetary policy has no significant relationship with economy situation of Nigeria.

H1: The monetary policy has a significant relationship with economy situation of Nigeria.

HYPOTHESIS 2

Ho: Financial sector does not have any effect on the stock price volatility.

H1: Financial sector have effect on the stock price volatility.

HYPOTHESIS 3

Ho: The reforms of financial sector in Nigeria has no positive effect on Nigerian Economy.

H1: The reforms of financial sector in Nigeria has positive effect on Nigerian Economy.

1.8 DESCRIPTION OF RESEARCH INSTRUMENT

The researcher collected his data through the sue of a well designed questionnaires containing 15 close ended questions of likert scale type (statement with which the respondent shows the amount of agreement/disagreement).

Since the study is intended to measure the significance of Financial Deregulation Stock price volatility and monetary Policy in Nigeria. Then, this likert scale type of close ended questionnaire is appropriate.

1.9 POPULATION AND SAMPLING PLAN

The population of concern in this study is the financial sector. But the population would be rather too large for the study because of the area covered interms location geographically.

But for the purpose of this study, the researcher has decided to use stratified sampling method. This allows variability of elements selected within each stratum to be more homogenous than is the variability of elements between strata (Ogunjimi 2001)

1.10 OPERATIONAL DEFINITION OF KEY TERMS

1. Volatility: this is a situation of unstable trend as it relate to price stability in an economic.

2. Deregulation: this is a situation where there is a shift in the foregoing of a particular running system or a trend as it relates to a named sector.

REFERENCES

Asika N. (1991) Research Methodology in the Behavioural Science (Nigeria: Longman).

Aggarwal R. C. Inclan, and R. Leal (1999), Volatility in Emerging Stock Markets. Journal of financial and Quantitative Analysis, 34, March, 33-55

Bekaert, G. and C. Harvey (1997), Emerging Market Volatility, Journal of Financial Economics, 43, January, 29-77

Borensztein, E. and R. G. Gelos (2000), A Panic-Prone Pack? The Behaviour of Emerging Market MutualFunds. IMF Working Paper 00/198.

DeSantis, G. and S. Imrohoroglu (1997) Stock Return and Volatility in Emerging Financial Markets, Journal of International Money and Finance, 16, August 561-579

Ogunjimi, M. O. (2001), Introduction to Research methodology and Data processing Nigeria: Joytal Printing Press

Reinhart, V. (2000), How the Machinery of International Finance Runs with Sand in its Wheels. Review of International Economics, 8 February 74-85