Predictive Impacts of Interest Rate Dynamics and Global Financial Crises on Stock Returns and Volatility: A Nigerian Context

Abstract

This paper examines the impacts of interest rate and its volatility on stock returns and stock returns volatility and the effect of interest rate during the global financial crises on stock returns and stock returns volatility using monthly All Shares Index prices of the NSE market and 3-month bank deposit rate covering the period of 1985M1-2010M12. GARCH (1, 1) specification with multivariate regressors was employed and the result shows that interest rate has significant negative impact on both stock returns and stock returns volatility; interest rate volatility has significant positive impact on both stock returns and stock returns volatility and during the global financial crises, interest rate has no significant impact both on stock returns and stock returns volatility. This result indicates that interest rate exerts strong predictive impact on stock market returns and there exist volatility spillover effect on stock market condition. It then becomes crucial for investors and policy makers to pay attention to interest rate changes when predicting stock market condition.