INFLATION RATES, FINANCIAL OPENNESS, EXCHANGE RATES AND STOCK MARKET RETURNS VOLATILITY IN NIGERIA

Employing the Autoregressive Conditional Heteroskedasticity (ARCH) and Generalized Autoregressive Conditional Heteroskedasticity (GARCH) models introduced by Engle {1982) and Bollerslev (1986) respectively, this study examines the relationship between inflation rates, financial openness, exchange rates and stock market volatility in Nigeria, for the periods 1985 to 2012. The results from this study reveals that previous periods inflation rates significantly but negatively impact volatility in market returns, while previous financial openness does not have significant impact on volatility in market returns. However, previous exchange rates were found to be significantly and positively associated with market return volatility. Another result of interest in this study is that changes in inflation rates, financial openness and exchange rates have no significant impact on market returns volatility. Based on these results, it is recommended that the government through her policy makers and relevant agencies (like the Central Bank of Nigeria - CBN) should ensure that appropriate measures (such as credit control, reduction in unnecessary government expenditure, increase production, anti-inflationary budgetary policy) are employed towards monitoring inflation in the country. This would certainly reduce stock market volatility, improve stock market returns and boost investors' confidence in the Nigerian stock market