Volatility transmission in the Nigerian financial market

Abstract

This paper examines the return and volatility spillovers in the Nigerian Financial market. We specifically analyse the spillovers in the capital market, money market and foreign exchange market utilizing monthly data for the period January 2002 to June 2017. The paper employs the Diebold and Yilmaz (DY hereafter) (2009, 2012) approach to compute the total spillover, directional spillover, and net spillover indexes. We also consider the rolling window analyses to capture the secular and cyclical movement in the financial markets over the period of consideration. The paper observes weak degree of interdependence as well as cross-market spillovers among the financial instruments.The stock market is the largest net receiver and sender of return spillovers to other markets, while the foreign exchange market is the net giver of volatility spillovers followed by the money market, and the stock market is the net recipient. In addition, return spillovers unveils slight trends and bursts while volatility spillovers show significant bursts but no trends. Concomitantly, the significant burst was attributed to the removal of currency peg in 2016 by the Central Bank of Nigeria. Our results are robust to the different VAR lag structure.