MEMORY RESPONSE OF CAPITAL MARKET PERFORMANCE TO INTEREST RATES ANNOUNCEMENT: A THEORETICAL EVIDENCE IN NIGERIA

Despite the management of interest rates by the monetary policy authorities over these years, the performance of the capital market has not been impressive in Nigeria. The study analyzed the memory response of the capital market performance to interest rates announcement in Nigeria. The study used monetary policy rate, and deposit market rate as against market capitalization. The study sourced data from the Central Bank of Nigeria Statistical Bulletin between 1985 and 2020. The study adopted the Augmented Dickey-Fuller, and the Autoregressive Distributed Lag for the analysis. The findings showed that, deposit money rate was stationery at levels, while monetary policy rate, and market capitalization were stationery at first differences, and no long run co-integrating equation. The theoretical evidence from the Error correction test findings revealed that, interest rates announcement did not constitute significant variables on the memory of the Nigerian capital market performance. Regular monitory and downward review of interest rates by the Nigerian monetary concluded that interest rates announcement did not constitute significant variables to influence capital market performance memory in Nigeria. The study further discovered monetary rate to be passive, and the deposit market rate attempted to obstruct market performance. The findings revealed substantial evidence that a lower interest attracts for more investment in the capital market, and a higher interest rate conversely makes the money market more attractive for investors.


ISSN: 2320-5407
Int. J. Adv. Res. 9 (10), 857-866 858 environment. Madura (1995) stated that, one of the most prominent economic forces driving the stock market price is the risk-free interest rate. Conversely, Muktadir-Al-Mukit (2012) opined that, interest rate was considered to be among of the key index that significantly affected stock prices. Also, Omodero (2020) identified a harmful effect caused by interest rate on the capital market performance in Nigeria. Interest rate can be referred to an amount charged on funds as a percentage of the principal. The opportunity cost for investing in a stock is represented by the interest rate. The interest rate is regarded as one of the inspiring factors that move s the attitude of investors in the capital market. From instance, as the interest rises, bonds turn out to be more attractive given their risk-return features. This encourages investors to switch from capital market to the money market by buying bonds and selling stocks, hence, influenced the capital market performance. Although, Echekoba, Ananwude, and Lateef (2018) argued, andidentified monetary policy rate not co-integrated in the long run with capital market performance in Nigeria.
Consequently, Fama (1981) stated that the influence of the long-term interest rate on stock prices stems directly from the present value model, and such can influence the long-term interest rate on the discount rate. Campbell (1987) analysis showed that, the term structure of interest rate predicted the excess stock market return in US. Moreover, Zhou (1996) found interest rate to have impact on the stock price significantly, andascertain that, the long-term interest rate explains a major part of the variation in the price dividend ratio. Issahaku, Ustarz, and Domanban (2013) supported the above statement from vector error correction model (VECM) results, that, it takes approximately 20 months for the capital market to fully adjust to a balance spot based on interest rate announcement in Ghana. Although, Phuyal (2016) discovered about 1.79% on monthly basis to correct the disequilibrium between stock prices and interest rate in Nepali.
In light of the above literatures, the capital market performance is influence by interest rates announcement bearing in mind about the much business failures in Nigeria. Despite the management interest rates by the monetary policy authorities, the performance of businesses and capital market environment has not been impressive in Nigeria. In this view, there is urgent need to theoretically and empirically analyze, and account for this phenomenon, since there is no recent study of this kind. Thus, the study will close this gap to assess the memory response of capital market performance to interest rates announcement in Nigeria.The study will focus on reviewing theoretical relationship between market performance and interest rate. In this domain, it is imperative to ask; to what extent did the memory of capital market performance significantly respond to interest rates ofmonetary policy rate, and deposit market rate announcement in Nigeria within the period, 1985-2020. Hypothetically, the memory of capital market performance did not significantly respond to interest rate of monetary policy rate, and deposit market rates announcement in Nigeria within the period, 1985-2020.
The findings from this study will enrich and serves as reference materials to scholars/academics. Again, policymakers will be guided in regulating the monetary policies, and the capital market. Further, industrial practitioners such as banks, investors, market players and other section in the financial institutions would find this study important as it will expose the memory response of capital market performance to interest rates announcement. Lastly, the findings from this study will further create awareness and give a better understanding about the reaction of interest announcement to capital market performance, especially in Nigeria.
The variables of this study were extracted from the Central Bank of Nigeria (CBN) statistical bulletin. In this light, market capitalization was proxy for capital market performance being the dependable variable, whereas monetary policy rate, and deposit market rate stand in for interest rates being the independent variables. The variables covered a period of 1985-2020, (35 years). The study intended to make the work as current as possible by adopting up-todate information and to capture a longer period.

Theoretical Review
Risk and returns are guiding parameters for choice of investment by investors. It is however impossible for any potential investor to ventures into investment/portfolio without risk and returns thorough evaluation. Harry Markowitz in 1952 introduced the diversification construct of not putting all eggs in one basket as identified in the modern portfolio theory. Following this adage, some investors has opted to create a portfolio by combining shortterm (money market) and long-term (capital market) investments. Markowitz (1952) ascertained that it is not enough to take one identity stock risk and return under acceptance but instead allocate it to different stocks with little correlation to one another.This is for the fact that, risks are commonly associated with the macroeconomic environment.Economic theories postulated that market performance could be affected by exogenous factors like 859 interest rate announcement.Scholars in financial economics have developed significant theories totest interest rate announcement and the stock market performance memory response. Among these theories were the arbitrage pricing theory (APT) introduced by Ross (1976) which postulated that, stock market performance is influenced macroeconomic variables such as inflation, interest rate, money supply, industrial production, etc. The brain behind this theory is that market performance is generated by common factors for which different securities have diverse sensitivities in the market.
Theoretically, it implied that market performance is a function of macroeconomic factors. As opined by Fama (1965) cited in Alexndra (2015) that, market performance response to current information in the efficient market hypothesis. And, according to the theory of greater fool that, during the periods of market instability, speculators can achieve abnormal gains by buying high costs believing that investors will be willing to buy back high. Again, the theory of rational expectation assumed that, human knowledge is acquired and through the process of learning with the presupposition of an existing and highly constant which can be possibly revealed by economic variables. This theory supports the works of Ivan and Alfonso (2014) that macroeconomic instabilities are often caused by shocks that hit an economy.
According to Karp and Vuuren (2019) in fractal market theory, stated that, the chaotic environment just as the capital market has some features of unpredictability, instability, disorder, noise, and lack of much regulatory bodies. Vaga (2018) in relation with the coherent market, discovered that during periods of coherence, the performance from the market is over 25 percent and the standard deviation will drop 10 percent. In the market prospect theory, Kahneman and Tversky (1979) stated that, the prevalence of risk aversion is the best-known generalized regarding perilous choice. Sharpe (1964) stated two assumptions; there is a pure interest rate, secondly, investors are homogeneity. Also, Fama and French (2004) in the capital asset pricing theory, identified an efficient portfolio if the asset price is clear in the market.
The differential international Fisher's effect further showed a relationship between interest rate and capital market performance. The interest rate differential International Fisher's Effect (IFE) theory holds that the strategy of borrowing on one country and investing the funds in another country should not provide positive returns on average. The reason is that the exchange rate should adjust to offset the interest rate differential on average. The Discounted Cash Flow (DCF) Model is one of the most widely used stock valuation approaches which were based on the concept that the value of a stock is equal to the present value of the cash flow expected to be received from the stock. The discount rate that is related to the interest rate, is one of the most important parameters of these approaches. When an interest rate changes, investors will incorporate these changes in their stock price valuation. Therefore, a rise in interest rate will reduce the present value of future cash flow which investors are expected to receive in the form of dividends and capital gains.

Methodology:-
The study adopted Ex-post facto research design. The work is country-specific, and it was based on past phenomenon. The ex post facto research design is best fit for the establishment of response relationships. Thus, in an attempt to analyze and account for the memory response of capital market performance to interest rates announcement with bias to theoretical evidence in Nigeria.This study added in its design, the econometric/analytical framework to theoretically test the ex-post facto.
The data was sourced from the Statistical Bulletins of the Central Bank of Nigeria (various issues). The data sets were time series that followed regular time-frequency of annualized for both the dependent and explanatory variables. The proxy for the dependent variable being capital market performance was the market capitalization, and the explanatory variables were monetary policy rate, deposit market rate for interest rates announcement. The study did not adopt any technique for sampling and population given that the study employed already existed data. The coverage period was 1985 to 2020 representing 35 years, and adopted the Autoregressive Distributive Lag (ARDL) model. The adoption of ARDL was based on its merits in different order levels of data stationary.

Model specification
The theoretical application of this study is the arbitrage pricingtheory (APT). The theory holds that market performance response to the macroeconomic environment such as interest rate. The theory implies that the announcement of new interest conveys shocks to the market performance. The theory has a connection with interest rates announcement, and the announcement rates affect the memory response of capital market performance. Thus, 860 the theory in itself provided a nexus between the interest rates announcement and the memory response of capital market performance in Nigeria. Although, with the instability of interest rates/marker performance in Nigeria it needed to be theoretically and analyzed, and accounted for, since there were other perceived macroeconomic factors like the inflation rate. Thus, the APT function was expressed as: UsingMCAP to be a performance index and interest rates announcement to be monetary policies indicators such as monetary policy rate, and deposit market ratewere theoretically, and empirically analyzed, and accounted for, in a linear functional relationship as follows: . 2 was restated into linear mathematical form, thus: From the theoretical standpoint, this study was designed to validate or otherwise of the APT using variables in Nigeria. Normally, from the empirical viewpoint, the regression in eq. 3 can be rewritten in econometric form. Based on this fact, the linear equation is stated thus: In eq. 4 above, all the variables were 0 = the constant (the value of the dependent variable when all the regressors are at zero); 1 -2 were the coefficients of the explanatory variables and is the noise or error term. The model variables of this study consisted of market capitalization as a broad dependent variable that can response to interest rates announcement, which serves as explanatory variables.

Concepts of the model variables
The variables of this study consisted the dependent and the explanatory. The dependent of this study was the market capitalization of the Nigerian Stock Exchange. It served as the proxy for capital market performance. While monetary policy rate, and deposit market rate were the explanatory variables of the Central Bank of Nigeria. It served as the proxy for interest rate announcement.

Market capitalization:
Market capitalization (MCAP)was employed as the dependent variable in the model. It is a performance measurement for depth, and is valued in Billons of Naira. A yielding sensitivity higher than zero is expected.

Monetary policy rate:
Monetary policy rate (MPR) was adopted in the study as an independent variable. It is the interest at which the Central Bank of Nigeria lends to the money deposit banks. It is an interest rate used to control inflation in an economy. A yielding sensitivity less than zero is expected.

Deposit market rate:
Deposit market rate (DMR) was also adopted in the study as an independent variable. It is an interest rate that is paid by financial institutions to depositors holding an account. A yielding sensitivity higher than zero is expected.

Estimation Procedure
The estimation process for this work followed the preliminary and other diagnostics test, as well asinferences-Test of Hypotheses usingthe autoregressivedistributive lag model estimates (ARDL). The preliminary test for data stationary of the study variables were conducted. The traditional unit root test for stationary of the data by Dickey-Fuller test was initiated to indicate the unit root properties of the series following equation specified (eq. 5).
Where the test is for = = 0 1 = < 0. where: n represents either the sample size, the number of observations, or the number of data points in x. k represents free parameters to be estimated.

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L represents the maximized value of the likelihood function for the estimated model M given as L= (  , ℳ).

Long Run and Co-integration Test (Bound Test)
This study also carried out the long run test following the ARDL framework.

ARDL short run error correction representation
After the establishment of the possible long-run relationship through the bound test, the ARDL model was used to test the lag of market capitalization to the response from the interest rates announcement. This follows the form specified below: For the Model with LOGMCAPR as the dependent variable: All the variables were discussed above with combined modeling of the short-run and long-run coefficients using the ARDL framework.
The a priori expectations from the models' tests of the hypotheses were given as follows; 1 > 0, 2 > 0 To ensure that estimates were valid, efficient, and unbiased inferences in this study, the diagnostic test and the procedure as prescribed two critical values namely lower and the upper bound, and the decision rule guides were contained in table 1 below:

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Inferences of this study were based on the outcome of the estimation approaches as well as conclusions drawn based on the tested hypothesis. The choice level of significance for all tests was the 0.05 or 5% level and in confirmation with the 1.96 t-Statistics critical value. All estimations were done using version 10 of the E-views estimation software.

Data presentation and discussions of results
This section presented data of the study and discussed the findings of the results.

Presentation of data
The data were presented in table 2 below:   From the table, the observed R 2 value of 2.067185 with its corresponding probability of 0.3557 which was above five percent (0.05) indicated that the model is free from serial correlation, since the p-value is greater than 0.05 shows evidence against higher-order autocorrelation. Nevertheless, the study can proceed to conduct for heteroskedasticity in table 5 below.
The results of the heteroskedasticity test were presented in table 5 below: From the table, the observed R 2 value of 1.448997 with its corresponding probability of 0.2287 which was above five percent (0.05) implied that the model is free from heteroskedasticity. Since the p-value is greater than 0.05 showed evidence in favor of homoscedasticity, hence the model can proceed for further analysis. This however, authorized for of long run bound test in table 6, even at different order integration approved by ARDL model.
The results of the long run Cointegration Bound Test were presented in table 6 below: * p-value incompatible with t-Bounds distribution. ** Variable interpreted as Z = Z(-1) + D(Z).

Source: Extracted from E-view 10.0 computation
The long run cointegration bound test presented in table 6, showed no cointegration equation from the results. The results showed that the interest rates variables employed had no significant long run respond with market performance in Nigeria. This is because, the associated probability values were higher than 0.05 significance levels. Hence, it can be concluded from the findings that the memory of the capital market performance did not significant response to interest rate of monetary policy, and deposit market rate announcement in the long run in Nigeria. However, the short-term results for lag adjustment were followed as shown in table 7.

Test of Hypotheses
The hypotheses were rewritten in null and alternative forms to enable the study conduct the test; thus: H01: memory of capital market performance did not significantly respond to monetary policy rate, and deposit market rate announcement in Nigeria within the period, 1985-2020. Ha1: memory of capital market performance significantly responds to monetary policy rate, and deposit market rate announcement in Nigeria within the period, 1985-2020.

Discussion of Findings:-
The reported coefficients, from the ARDL lag 2 estimations, were 1.121480,48.86469, -113.2510, with the probability values of 0.0000, 0.7741, 0.4237 respectively for MCAP, MPR, and DMR. Judging from these results, monetary policy rate had a positive, while deposit market rateexerted a negative but insignificantly responded with the memory of capital market performance in Nigeria. Conversely, capital market development responded positively and significantly to the Nigerian economic growthrate. The decision rule justified was based on the fact that the probability values of monetary policy rate and deposit market were greater than 0.05 significance level, except formarket capitalization that was less than 0.05 significance level and as such H0cannot be rejected.
The economic implication to these results revealed that a unit change in monetary policy rate, had caused a48 units passive increases, while deposit market caused a decrease of 113 units butwith no significant effect on the memory of capital market performance in Nigeria.Whereas, capital market contributed about 1.12% to the Nigeria's economic growth rate for every reduction on interest rates announcement. These findings indicated a theoretical and empirical evidence that the memory of capital market performance didnot respond to interest rates announcement in Nigeria. While, the Nigerian capital market respond to economic growth rate provided interest rate announcement would have reduced by 48.86 and 113.25 for monetary policy rate and deposit market rate respectively. From these results in every increase of deposit market rate adversely affected the capital market performance in Nigeria. Consequently, every increase of monetary policy rate contributes passively to the performance of Nigerian capital market. Following from these results, the memory of the capital market performance can be accounted to interest rates announcement in Nigeria between 1985 and 2020. Although, the monetary policy rate and the deposit market rate did not constitute significant variables but needed an urgent attention and management.

Conclusion:-
This study has identified extensive research in capital market performance and the macroeconomic environment, but only few scholars have shown interest on the response of capital market performance to interest rates announcement phenomenon in Nigeria. Also, no study has tested the theoretical perspective in Nigerian circumstance using current data. However, this theoretical test showed empirical evidence that the memory of the capital market performance had a negative response to deposit market rate, and positive to monetary policy rate but not significant. The study 866 concluded that interest rates announcement did not constitute significant variables to influence capital market performance memory in Nigeria. The study further discovered monetary rate to be passive, and the deposit market rate attempted to obstruct market performance. The findings revealed substantial evidence that a lower interest attracts for more investment in the capital market, and a higher interest rate conversely makes the money market more attractive for investors.

Recommendation:-
In view of the findings, the study recommended the following: 1. The Central Bank of Nigeria through the monetary policy committee should downwardly review the deposit market rate to assist the private sectors access more credits. This mechanism will aid and reduced crowding-out effect in the business environment, because a low interest rate will possibly encourage investors to invest more stocks in the capital market. Hence, it will invigorate the financial system to economic growth rate of Nigeria. 2. The Securities and Exchange Commission should strengthen the advisory roles on the capital market participants by initiating laws that will enhance corporate governance and protect investors/shareholders concerning dividend policies. The guarantee or the assurance of regular and incremental dividend will help and make the general public to own shares, and thereby increase the capital market base. 3. The Central Bank of Nigeria should at all time monitor the stock market activities with reaction to the macroeconomic environment. The constant checks and appraisal of the macroeconomic variables will assist to maintain a health capital market in Nigeria.