The Dependence Structure Between Stock Market Returns and Short-Term Interest Rates in Nigeria (Copula Analysis)

The objective of the paper was to determine the dependence structure between stock market returns and short- term interest rates in Nigeria using a copula-based statistical model. Daily price data of the All-Share Index (ASI) from the Nigeria Stock Exchange and short-term interest rate, represented by the prime lending rate from March 1999 to December 2001 and the Monetary Policy Rate (MPR) from January 2002 to December 2022 from the Central Bank of Nigeria, were collected for the study. Student's t-copula was selected for the study as it considers the variables' non-linear dependencies and tail risks, which were not accounted for in previous research on subjects that used traditional linear statistics models. Short-term interest rates were relatively stable in the years of the study, while stock returns show high volatility, non-normal characteristics, and significant zero-peaked returns. The copula student's t-test, along with maximum likelihood estimation and subsequent goodness-of-fit tests, shows minimal tail dependence between the variables. This means that stock market return does not significantly depend on the short-term interest rate in Nigeria, and changes in short-term interest rates only explain a small part of the variation in stock market returns. Validity tests using the rolling window correlations and contour plots support the above findings. The study contributes to an in-depth understanding of the Nigerian market dynamics and highlights the importance of using advanced statistical analysis techniques for risk assessment, investment, and economic policy decision-making in Nigeria's financial markets.