Volatility transmission between money and stock markets: Evidence from a developing financial market

Abstract

The direction and intensity of volatility transmission between the money and stock markets are important for portfolio selection and diversification, optimal hedging strategy, financial market regulation, and risk management. The purpose of this paper therefore is to examine the nature of volatility transmission between money and stock markets in a developing economy using Nigeria data. The results of the bivariate BEKK-GARCH (1,1) model show strong evidence of ARCH and GARCH effects for both the money and stock markets returns. The results also suggest unidirectional shock transmission from the stock market to the money but not otherwise. Further, the results indicate evidence of a unidirectional volatility transmission from the stock market to the money market. The findings of this study have implications for portfolio selection and diversification as well as financial market regulation.

Keywords

• Money market
• stock market
• volatility transmission
• GARCH model
• developing financial market