Critical Evaluation of Stock Market Capitalization Response to Money Supply Management in the Nigerian Economy
The study evaluated stock market capitalization (MCAP) response to money supply management in Nigeria. The inability of the stock market to perform as expected despite the stiff supervisions and money supply inspired this evaluation. The study employed broad money supply (BMS) and credit to private sector (CPS) as explanatory variables on stock market capitalization with updated data spanning between 1981 and 2018 from the statistical bulletin of the Central Bank of Nigeria. The study also adopted a Vector Auto-Regression (VAR) model to illustrate the Arbitrage Pricing Theory. The results of the long run Johansen’s Co-integration test indicated a significant long-run response between the study variables. Further, the results of the short-term error correction revealed MCAP positively and significant responded to BMS at first instance. Again, MCAP positively and significantly responded to CPS, while MCAP and BMS results were insignificant in period two. In period three, however, MCAP positively and significantly responded to both BMS and CPS. In the impulse response results at periods 3 and 4, MCAP had a negative response to both BMS and CPS. Yet there was an exhibit in the variance decomposition results of stock market capitalization positively responding to money supply management. Moreover, the Granger causality results revealed MCAP, BMS, and CPS responding to one another. In conclusion, these findings constituted evidence of stock market capitalization positively and significantly responded to money supply management in Nigeria. The study recommends that the Central Bank of Nigeria should adopt policies that promote the availability of credit for the private sector by financial institutions. In this way, the private sector will be better empowered for capital market participation.