IMPACT OF MONETARY  POLICY ON STOCK PRICES IN NIGERIA
ABSTRACT
The study investigated the impact of monetary policy on stock price in Nigeria, using data covering a period of twenty six years, (1985 to 2010),with respect to three monetary policy factors, namely, broad money supply, monetary policy rate, and Treasury bill rate were included in the empirical analysis. The ordinary Least Squares method was employed in estimating the specified model.
    The principal conclusions of the study indicate That monetary policy does not have a strong effect on stock prices in Nigeria. In the empirical analysis, only one of the three monetary policy factors used in the model was significant, money supply has a significant positive impact on stock prices in Nigeria. As money supply rises, individuals tend to move some of the excess liquidity into the stock market, thereby boosting stock prices, That monetary policy rate has no significant impact on stock prices in Nigeria That Treasury bill rate has no significant impact on stock prices in Nigeria, This implies that activities in the money market have only marginally effects on the capital market, while the price level has a significant negative impact on stock prices in Nigeria.
CHAPTER ONE
INTRODUCTION
1.1    BACKGROUND TO THE STUDY
 The place of monetary policy in the determination of current stock prices in an economy cannot be underestimated, since it is one of the major weapons used by the central bank of Nigeria in regulating the volume of money in circulation which directly or indirectly affect the value of stock prices in the stock market and hence, the overall value of the firms issuing the stocks.  .
    A large practitioner and academic literature examines the effect of monetary policy on stock prices. Several studies address the impact of monetary policy surprises on daily or intra day stock returns, for example, while fewer consider longer-run effects on equity prices and Treasury yields. This research question has clear implications for both financial market participants and central bankers. With respect to the former, the subject is of course germane to the broader issue of empirical asset pricing, and practitioners spend considerable resources following (prospective)
monetary policy developments. Regarding the latter, the effect of monetary policy on equity prices and interest rates is relevant to several possible transmission mechanisms from central bank actions to the real economy. For example, the Central Bank of Nigeria controls the federal funds rate, which purportedly affects market-determined interest rates and asset prices and, in turn, real variables through various possible investment and consumption channels.
    According to Thabelo (2012), investors on the other hand need to know how monetary policy affects the performance of stock markets to be able to accurately measure the intrinsic value of stock. From a fundamentalist point of view, making profits from stock trading depends on an investor’s ability to accurately calculate stock’s intrinsic value. This is done by examining the environment of the firm; related economic, financial and other qualitative and quantitative factors. Only then can the investor compare the stock’s intrinsic value with its current market price and decide whether the stock in over priced or under priced. An overpriced stock would be the one that the intrinsic value is below the market price, while the reverse is true for the underpriced stock. Rational investors would buy underpriced stock, with the hope that the stock market price will rise to its intrinsic value thus making a profit from the spread. Inversely, rational investors would sell over-priced stock because they would be expected to fall in price towards their intrinsic value (Thabelo, 2012).
1.2    STATEMENT OF THE RESEARCH PROBLEM
    Monetary policy refers to the ways of managing money supply in an economy. The issue of monetary policy and its management is vested in the central Bank of Nigeria, whose primary aim is to ensure economic growth and a stable macroeconomic environment. According to Otmar (2009), the broad consensus around the world is that central banks should maintain price stability by keeping inflation low and stable, and that price stability is normally specified in term of stabilizing an index of consumer prices in one form or another; adding that money is undermined by an increase in consumer prices, a constant index of consumer prices maintains the real value of money over time.
    Over the years, Nigerians have encountered monetary policy in diverse ways such as the official cash rate (OCR), when they borrow money at retail interest rates through housing schemes (mortgages), personal loans-when they save money in banks account that earn interest which of course are directly related to the official cash rate (OCR) set by the central bank , and its effects  on inflation and economic activity (Reserve Bank of New Zealand, (2007). Therefore, in ensuring an enhanced macroeconomic and financial stability, the central bank of Nigeria has a commitment to optimum monetary policy conduct as well as delivering greater long-run stability of both internal and external macroeconomic factors within the context of the Nigerian economy (Igbinosa and Obayagbona, 2013).
    In view of the foregoing therefore, the study seeks to determine the impact of monetary policy on stock prices in Nigeria.Hence, the research questions to be addressed in the study are:
(i)    What is the relationship between monetary policy and stock prices in     Nigeria?
(ii)    Is there any relationship between money supply and stock price?
(iii)    Does exchange rate affect stock prices in Nigeria?
(iv)    What is the impact of inflation rate on stock prices in Nigeria?
(v)    Is there any relationship between central bank rediscount rate and stock prices in Nigeria?
1.3    OBJECTIVE OF THE STUDY
    The main objective of the study is to determine the impact of monetary     policy on stock prices in Nigeria. However, other sub objectives are to:
(i)    determine the relationship between money supply and stock prices.
(ii)    examine the impact of exchange rate on stock prices in Nigeria
(iii)    assess the impact of inflation rate on stock prices in Nigeria?
(iv)    determine the relationship between central bank rediscount rate and stock prices in Nigeria?
1.4       HYPOTHESES OF THE STUDY
    The following are the hypotheses to be tested in the study:
(i)    Monetary policy does not affect stock prices in Nigeria.
(ii)    Money supply has no significant effect on stock prices.
(iii)    Exchange rate has no significant impact on stock prices in Nigeria.
(iv)    There is no positive relationship between inflation rate and stock prices.
(v)    Central Bank Rediscount Rate does not affect stock prices in Nigeria.
1.5    SIGNIFICANCE OF THE STUDY
    The study is significant in the following respect:
Firstly, the results from the study will provide relevant data to the government and policy makers with respect to the effective and efficient management of the monetary policy issues affecting the nation’s stock market, which will in turn engender the overall growth of the Nigerian economy.
    Secondly, investors, potential investors, lenders and borrowers and all stakeholders in the Nigerian stock market are all interested in the monetary policy- stock prices direction in the country and hence, enable them to make some inform decisions with respect to investment and financing decisions.
    Furthermore, the study will also be relevant to researchers, academia, students of finance and allied disciplines, as it will provide them relevant data to carry out further studies in this area or similar areas if they so wish.
1.6    SCOPE OF THE STUDY
    The study is restricted to all quoted firms in the Nigerian capital market. It covers a period of twenty six  years (1985 to 2010), and relevant data shall be sourced from the Central Bank of Nigeria Statistical Bulletin (2011).
1.7    LIMITATION OF THE STUDY
    The two limitations envisage in this study has to do with the accuracy of the data used as well as the sources of data. However, effort will be made to minimize errors and thus assure the reliability of results obtained.