Banks Intermediation and Stock Prices of Deposit Money Banks in Nigeria: VECM and Variance Decomposition Approach

Abstract

This study adopts the Vector Error Correction Model (VECM) and the variance decomposition techniques in testing the financial acceleration theory in banks intermediation. The bank intermediation variable is categorized into variable deposit mobilization, loan administration, delegated monitoring and risk diversification. Using cointegration analysis and quarterly secondary data between 2009 and 2016, this study assessed the short and long run influence of the categorized bank activities on their stock prices. The results indicate that banks intermediation exact influence on both the short and long run stock prices of DMBs in Nigeria as the ECM (-0.1420) result showed a significant speed of adjustment towards equilibrium while the overall model fitness showed that there is a long run causality running from banks intermediation measures and stock prices. Similarly, the result of the variance decomposition of stock prices shocks indicate that over time a significantly increasing proportion of stock prices is explained by loans and capital (delegated monitoring).