Stock Market Reactions to Fiscal Policy Shocks: Empirical Evidence From Nigeria

Abstract

This study sets out to investigate the effect of fiscal policy on stock market performance in Nigeria. Specifically, the study examines if shocks in government expenditure and government debt affects stock market performance. The period of the study is from 1981-2012. Following the VAR estimates, the variance decomposition and impulse response analysis was employed to empirically show the effects of fiscal and policies on stock market performance. The result of this study reveals that market capitalization does not react immediately to fiscal policy but reacts with a significant time lag. This suggests that there is the need for effective fiscal policy coordination and increased efficiency of institutions that are expected to facilitate the fiscal policy execution. In addition, policy coordination between the central bank and the government is still relatively nascent. Consequently, the gains from policy coordination in the context of improving stock market performance could easily be eroded. Thus the study recommends that it will be useful to further strengthen the coordination arrangement by close monitoring of the impact of fiscal policies on the economy.

Key Words: Stock market, Fiscal policy, government expenditure, government debt and VAR.