The Effect of Regulations on Stock Market Risk (Volatility) in Nigeria

Authors

  • Monday Uhunmwangho University of Benin

DOI:

https://doi.org/10.5195/emaj.2022.255

Keywords:

Difference Generalized Method of Moments, Dynamic Model, Financial Regulations, Stock Market Volatility, Nigeria

Abstract

Recent regulations are directed at mitigating financial market risk, because risks, especially volatility dampen investors’ confidence, and hinder firms’ ability to raise funds at the exchange. Though, volatility had been investigated in the past, the joint utilization of micro and macro regulatory tools to address it after the global crisis is rare. It is on this backdrop that this study investigates the effect of regulations on stock market risk (volatility) in Nigeria. Thirteen interest charging banks listed in the Nigerian Exchange Limited for the period of 2010-2020 were investigated, because bank stocks are mostly traded at the exchange. Data for this study were collected from the banks’ annual reports, stock exchange official daily price lists as well as the Central Bank of Nigeria Statistical Bulletin various issues. The first difference generalized method of moments (DGMM) and the dynamic model were engaged in the investigation. Results of this study reveal that regulatory liquidity ratio and monetary policy rate positively and significantly impact stock market risk (volatility), while prescribe cash reserve ratio has negative and significant effects. The implication of this finding is that regulations except cash reserve instruments constitute frictions impacting equity market risk. Therefore, it is recommended that caution is exercised in the use of micro and macro regulatory weapons. Otherwise, investors’ confidence will decline and investments will reduce.

Author Biography

Monday Uhunmwangho, University of Benin

Department of Banking and Finance

References

Ajefu, J. B. & Barde, F. (2015). Market efficient and government intervention revisited: What do recent event tell us? Journal of International Business and Economics, 3(1), 20-23.

Arellano, M., & Bond, S. (1991). Some tests of specification for panel data. Review of Economic Studies, 58(9), 277-297.

Bleich, D., Fendel, B. & Bulke, J. (2013). Monetary policy and stock market volatility. Deutsche Bundesbank Discussion Paper No.45, 1-8. (https://papers.ssrn.com/sol3/papers.cfm)

Brumm, J., Kubler, F., Grill, M., & Schmedders, K. (2014). Margin regulation and volatility. European Central Bank Working Paper Series, No. 1698, July 2014, 1-39.

CBN. (2020). Financial markets development half year report, 1-92.

Chortareas, G., Girardone, C. & Ventouri, A. (2012). Bank supervision, regulation and efficiency: Evidence from the European Union. Journal of Financial Stability, 84), 292-302.

Chris, O. (2003). Financial regulation in Nigeria and challenges of the West African Monetary Zone. Seminar on the Issues in Financial Institutions Surveillance in Nigeria. Central Bank of Nigeria Training Centre Working Paper, No.3, 100-111.

Currie, C.V. (2003). Towards a general theory of financial regulation: Predicting, measuring and preventing financial crises. University of Technology Sydney School of Finance and Economics Working Paper No.132, October, 1-59.

Dewatripont, M., & Tirole, J. (1994). The prudential regulation of banks. Cambridge University Press, Cambridge, USA.

Degennaro, R.P. & Robotti, C. (2007). Financial market frictions. Federal Reserve Bank of Atlanta Economic Review, third quarter, 1-16.

Elkelish, W. W. & Tucker, J. (2016). Bank regulation and stock market stability across countries. Journal of Financial Regulation and Compliance, 24(4), 402-419 (https://dx.doi.org/10.1108/JFRC-09-2015-0049)

Fabizzi, F.J. and Drake, P. P. (2009). Finance, capital markets, financial management and investment management. John Wiley and Sons, Inc. New Jersey, USA.

Gujarati, D.N. (2009). Basic econometrics (5th Edition.). McGraw-Hill Companies INC, USA.

Gummi, M.U. (2015). Financial regulations and the Nigeria’s banking sector. Journal of Research in Business and Management, 3(11), 5-13.

Hansen, L.P. (1982). Large sample properties of generalized methods of moments estimators. Econometrica, 50, 1029-1054.

Huo, Z., & Rios-Rull, J. (2016). Financial frictions, asset prices, and the great recession. Federal Reserve Bank of Minneapolis staff report No.526, February 2016.

Jensen, M.C. (1986). Agency costs of free cash flow, corporate finance and takeover. American Economic Review, 76(2), 323-329.

Jun, S., Marathe, A., & Shawky, H. A. (2003). Liquidity and stock returns in emerging equity markets. Emerging Markets, 4(1), 1-24.

Osuagwu, E.S. (2009). The effect of monetary policy on stock market performance in Nigeria. Nigerian Journal of Securities and Finance, 14(2), 17-42.

Onoh, A.U.(2017). Monetary policy instruments and their effect on turnover ratio of commercial banks in Nigeria. Journal of Business and African Economy, 3(1), 61-95.

Olbrys, J., & Majewska, E. (2014). Implications of market frictions: Serial correlations in indexes on the emerging stock markets in Central and Eastern Europe. Operations Research and Decisions, 1, 51-70.

Sarin, N. & Summers, H.L. (2016). Understanding bank risk through market measures. Brookings Papers on Economic Activity, 57-127.

Shaban, O.S., Al-Zubi, Z. & AlGhusin, N.A. (2017). The effect of financial and cash policies on the performance and risk assessment of Amman stock exchange market. Ekonomski Pregled, 68 (5), 541-553.

Stieglitz, J. (1989). Financial market and development. Oxford Review of Economic Policy, 5(5), 55-68.

Tchereni, B. H. M, & Mpini, S. (2020). Monetary policy shocks and stock market volatility in emerging markets. Risk Governance and Control: Financial Markets & Institutions, 10(3), 50-61 (http://doi.org/10.22495/rgcv10i3p4)

Tennant, F.D. & Tracey, R.M (2014). Financial intermediation and stock market volatility in a small bank-dominated economy. The Journal of Developing Areas, 48(4), 73-95.

Umar, B. & Nayan, S. (2018). Does regulatory quality matters for stock market development? Evidence from Africa. International Journal of Economics and Financial Issues, 8(4), 10-15.

Wang,Y., Tsai, J. and Li, Q.(2017). Policy impact on Chinese stock market: From 1994 Bailout policies to the 2015 Shanghai-Hong Kong stock connect. International Journal of Finance Studies, 5(4), 1-19.

Zgarni, A. & Hassouna, F. (2018). Regulation and bank performance. The Journal of American Business Review, 6(2), 15-22.

Zare, R., Azahi, M. & Habitullah, M.S. (2013). Monetary policy and stock market volatility in the ASEAN5: Asymmetries over bull and bear markets. Procedia Economics and Finance, 7, 18-27.

Downloads

Published

2022-08-17

Issue

Vol. 12 No. 1 (2022)

Section

Articles

License

Authors who publish with this journal agree to the following terms:

  1. The Author retains copyright in the Work, where the term “Work” shall include all digital objects that may result in subsequent electronic publication or distribution.
  2. Upon acceptance of the Work, the author shall grant to the Publisher the right of first publication of the Work.
  3. The Author shall grant to the Publisher and its agents the nonexclusive perpetual right and license to publish, archive, and make accessible the Work in whole or in part in all forms of media now or hereafter known under a Creative Commons Attribution 4.0 International License or its equivalent, which, for the avoidance of doubt, allows others to copy, distribute, and transmit the Work under the following conditions:
    1. Attribution—other users must attribute the Work in the manner specified by the author as indicated on the journal Web site;
    with the understanding that the above condition can be waived with permission from the Author and that where the Work or any of its elements is in the public domain under applicable law, that status is in no way affected by the license.
  4. The Author is able to enter into separate, additional contractual arrangements for the nonexclusive distribution of the journal's published version of the Work (e.g., post it to an institutional repository or publish it in a book), as long as there is provided in the document an acknowledgement of its initial publication in this journal.
  5. Authors are permitted and encouraged to post online a prepublication manuscript (but not the Publisher’s final formatted PDF version of the Work) in institutional repositories or on their Websites prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work. Any such posting made before acceptance and publication of the Work shall be updated upon publication to include a reference to the Publisher-assigned DOI (Digital Object Identifier) and a link to the online abstract for the final published Work in the Journal.
  6. Upon Publisher’s request, the Author agrees to furnish promptly to Publisher, at the Author’s own expense, written evidence of the permissions, licenses, and consents for use of third-party material included within the Work, except as determined by Publisher to be covered by the principles of Fair Use.
  7. The Author represents and warrants that:
    1. the Work is the Author’s original work;
    2. the Author has not transferred, and will not transfer, exclusive rights in the Work to any third party;
    3. the Work is not pending review or under consideration by another publisher;
    4. the Work has not previously been published;
    5. the Work contains no misrepresentation or infringement of the Work or property of other authors or third parties; and
    6. the Work contains no libel, invasion of privacy, or other unlawful matter.
  8. The Author agrees to indemnify and hold Publisher harmless from Author’s breach of the representations and warranties contained in Paragraph 6 above, as well as any claim or proceeding relating to Publisher’s use and publication of any content contained in the Work, including third-party content.

Revised 7/16/2018. Revision Description: Removed outdated link.