ABSTRACT

 Financial Market indicators are quantitative factors that predict the future behaviour of financial assets prices and returns. Understanding how key financial market indicators behave is important to making optimal investment decisions as well as effective regulation of the financial markets. Based on these important applications, this study investigated the response of stock market returns to changes in selected financial market indicators such as monetary policy rates, exchange rates and inflation rates, by employing descriptive statistics, unit root tests, heteroscedasticity, autocorrelation, granger causality test and the ARDL test on monthly observations from January 2000 to December 2016. Results of preliminary data analysis using descriptive statistics showed that the mean monthly returns were positive for the stock market and that the standard deviation was high for all the indicators. The returns distribution of the stock market returns was negatively skewed whereas those of the exchange rates, monetary policy rates and inflation rates were positively skewed. Results of Augmented Dickey-Fuller and the Phillips Perron (PP) tests indicated that all the stock market and financial indicators log-level series contain unit roots but the series returns show absence of unit roots. Results of ARDL model showed that stock market returns do not respond to changes in monetary policy rates and inflation rates in Nigeria. The ARDL results however showed that stock market returns respond to changes in exchange rates in Nigeria. Results of the variance decomposition showed that financial market indicators contributed no information to the variance ofthe stock market returns in the first month. However shocks in the exchange rate contributed 2.4% to the variance of stock market returns in the third month and 16.3% after. The monetary policy rate and inflation rate contributed 2.6% and 1.9% shock respectively to the variance of stock market returns after one year. Granger causality tests estimated to examine whether causality relationship exists between stock market returns and financial market indicators in Nigeria, indicated evidence of unidirectional causality from exchange rate to stock returns. The implication is that there is significant unidirectional causality from change in a financial market indicator to stock market in Nigeria. The study recommended, among others, that monetary and capital market authorities should formulate and implement policies that would enhance the linkage between money market and stock market in Nigeria; and that stock market portfolio managers should be alert to changes that emanate from foreign exchange market as part oftheir investment strategy because ofthe significant effect offoreign exchange on the stock market.