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Conditional Variance and Interest Rates in Nigeria: Evidence from the Egarch-in-Mean Framework

Received: 18 July 2020     Accepted: 26 August 2020     Published: 31 December 2020
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Abstract

This study captured the components of Exponential Generalized Autoregressive Conditional Heteroscedasticity (EGARCH-in-mean) framework; conditional variance (volatility), asymmetric effect and volatility persistence and interest rate in Nigeria. This is because ofthe usefulness of interest rates in measuring the financial conditions, also are major instrument of monetary policy and volatility being one of the most important concepts in finance. The study used real interest rate obtained from Central Bank of Nigeria and National Bureau of Statistic from 1970 to 2018 inclusive. The accommodating EGARCH-in-mean framework was employed in the estimation of the model. The following were found; conditional volatility is negatively and significantly related to interest rate. Also that interest rate volatility in Nigeria is not persistent. Again, there is existence of leverage effect, implying existence of asymmetric effect in the Nigerian financial market due to interest rate volatility. Consequently, the researchers suggest as follows; due to the presence of asymmetry effect, the Bankers’ Committee tightens their seat belt to forestall subsequent volatility in interest rate in Nigeria by consistently and regularly reviewing interest rate to accommodate the dynamism of the economy. Again adequate palliative measures be made available to enable investors continue with their economic activity in any business cycle in Nigeria.

Published in Mathematics Letters (Volume 6, Issue 3)
DOI 10.11648/j.ml.20200603.12
Page(s) 36-41
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2020. Published by Science Publishing Group

Keywords

Real Interest Rate, Volatility, Volatility Persistence, Asymmetric Effect, EGARCH

References
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[3] Chan, K. C., Karolyi, G. A., Longstaff, F. A. & Sanders, A. B. (1992). An empirical comparison ofalternative models of the short-term interest rate. Journal of Finance, 47, 1209-1227.
[4] Christie, A. A. (1982). The stochastic behavior of common stock variance-value, leverage and interest rate effects. Journal of Financial Economics, 10 (4), 407-423.
[5] Ejem, C. A., Ogbulu, O. M., Ogbonna, U. G, &Fijoh, K. O.(2020). Financial management and policy: An analytical approach. Aba: Onemec Publishers.
[6] Emenike, K. O. &Aleke, S. F (2012). Modeling asymmetric volatility in the Nigerian stock exchange. European Journal of Business and Management, 4 (12), 52-59.
[7] Engle, R. F. & Ng, V. K. (1993). Measuring and testing the impact of news on volatility. Journal of Finance, 48 (1), 1749-1778.
[8] Ezirim, C. B. (2005). Finance Dynamics: Principles, techniques and applications (3rd ed). Portharcourt: Markowitz Centre for Research and Development.
[9] Ezirim, C. B., Ejem, C. A., Ogbonna, U. & Chukwu, U. O. (2019). Do interest rates and savings cause domestic investments in developing economisc? Macrofinamatric evidence fromNigeria. International Journal of Business and Economics Perspectives, 14 (1), 1-21.
[10] Graham, J. K & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidencefrom the field. Journal of Financial Economics, 60, 187-243.
[11] Kuepper, J.(2020). Defiinition of Volatility. https://www.investopedia.com/terms/v/volatility.asp.
[12] Levacic, R. &Rebmann, A. (1982). Macroeconomics: An introduction to Keynesian-Neoclassicalcontroversies. New York: Macmillian.
[13] Nelson, D. (1991). Conditional heteroscedasticity in asset returns: a new approach. Journal of Econometrics, 59 (2), 347-370.
[14] Ngugi, R. W. & Kabubo, J. W. (1998). Financial sector reforms and interest rate liberalization: The Kenya experience. AERC Research Paper 72; African Economic Research Consortium, Nairobi.
[15] Nzotta, S. M. (2004). Money, banking and finance: Theory and practice (2nd ed). Owerri: Hudson Jude Nig Publishers.
[16] Okpara G. C. (2012). Volatility modeling and the Nigerian stock return relationship in EGARCH-in-mean framework. International Journal of Current Research, 3 (8), 176-185.
[17] Okpara, G. C. (2015). Mathematics of finance: An introductory survey (2nd ed). Enugu: De-Sanctity Publications.
[18] Olan, T. H. & Sandy, S. (2005). Testing for asymmetry in interest rate volatility in the presence ofa neglected level effect. The University of Melbourne &The University of Queensland.
[19] Olwenyi, T. (2011). Modeling volatility of short-term interest rates in Kenya. International Journal of Business and Social Science, 2 (7), 289-303.
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Cite This Article
  • APA Style

    Ejem Chukwu Agwu, Ogbonna Udochukwu Godfrey. (2020). Conditional Variance and Interest Rates in Nigeria: Evidence from the Egarch-in-Mean Framework. Mathematics Letters, 6(3), 36-41. https://doi.org/10.11648/j.ml.20200603.12

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    ACS Style

    Ejem Chukwu Agwu; Ogbonna Udochukwu Godfrey. Conditional Variance and Interest Rates in Nigeria: Evidence from the Egarch-in-Mean Framework. Math. Lett. 2020, 6(3), 36-41. doi: 10.11648/j.ml.20200603.12

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    AMA Style

    Ejem Chukwu Agwu, Ogbonna Udochukwu Godfrey. Conditional Variance and Interest Rates in Nigeria: Evidence from the Egarch-in-Mean Framework. Math Lett. 2020;6(3):36-41. doi: 10.11648/j.ml.20200603.12

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  • @article{10.11648/j.ml.20200603.12,
      author = {Ejem Chukwu Agwu and Ogbonna Udochukwu Godfrey},
      title = {Conditional Variance and Interest Rates in Nigeria: Evidence from the Egarch-in-Mean Framework},
      journal = {Mathematics Letters},
      volume = {6},
      number = {3},
      pages = {36-41},
      doi = {10.11648/j.ml.20200603.12},
      url = {https://doi.org/10.11648/j.ml.20200603.12},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ml.20200603.12},
      abstract = {This study captured the components of Exponential Generalized Autoregressive Conditional Heteroscedasticity (EGARCH-in-mean) framework; conditional variance (volatility), asymmetric effect and volatility persistence and interest rate in Nigeria. This is because ofthe usefulness of interest rates in measuring the financial conditions, also are major instrument of monetary policy and volatility being one of the most important concepts in finance. The study used real interest rate obtained from Central Bank of Nigeria and National Bureau of Statistic from 1970 to 2018 inclusive. The accommodating EGARCH-in-mean framework was employed in the estimation of the model. The following were found; conditional volatility is negatively and significantly related to interest rate. Also that interest rate volatility in Nigeria is not persistent. Again, there is existence of leverage effect, implying existence of asymmetric effect in the Nigerian financial market due to interest rate volatility. Consequently, the researchers suggest as follows; due to the presence of asymmetry effect, the Bankers’ Committee tightens their seat belt to forestall subsequent volatility in interest rate in Nigeria by consistently and regularly reviewing interest rate to accommodate the dynamism of the economy. Again adequate palliative measures be made available to enable investors continue with their economic activity in any business cycle in Nigeria.},
     year = {2020}
    }
    

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    T1  - Conditional Variance and Interest Rates in Nigeria: Evidence from the Egarch-in-Mean Framework
    AU  - Ejem Chukwu Agwu
    AU  - Ogbonna Udochukwu Godfrey
    Y1  - 2020/12/31
    PY  - 2020
    N1  - https://doi.org/10.11648/j.ml.20200603.12
    DO  - 10.11648/j.ml.20200603.12
    T2  - Mathematics Letters
    JF  - Mathematics Letters
    JO  - Mathematics Letters
    SP  - 36
    EP  - 41
    PB  - Science Publishing Group
    SN  - 2575-5056
    UR  - https://doi.org/10.11648/j.ml.20200603.12
    AB  - This study captured the components of Exponential Generalized Autoregressive Conditional Heteroscedasticity (EGARCH-in-mean) framework; conditional variance (volatility), asymmetric effect and volatility persistence and interest rate in Nigeria. This is because ofthe usefulness of interest rates in measuring the financial conditions, also are major instrument of monetary policy and volatility being one of the most important concepts in finance. The study used real interest rate obtained from Central Bank of Nigeria and National Bureau of Statistic from 1970 to 2018 inclusive. The accommodating EGARCH-in-mean framework was employed in the estimation of the model. The following were found; conditional volatility is negatively and significantly related to interest rate. Also that interest rate volatility in Nigeria is not persistent. Again, there is existence of leverage effect, implying existence of asymmetric effect in the Nigerian financial market due to interest rate volatility. Consequently, the researchers suggest as follows; due to the presence of asymmetry effect, the Bankers’ Committee tightens their seat belt to forestall subsequent volatility in interest rate in Nigeria by consistently and regularly reviewing interest rate to accommodate the dynamism of the economy. Again adequate palliative measures be made available to enable investors continue with their economic activity in any business cycle in Nigeria.
    VL  - 6
    IS  - 3
    ER  - 

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Author Information
  • Department of Banking and Finance, Abia State University, Uturu, Nigeria

  • Department of Management Science, Rhema University, Aba, Nigeria

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