Interest rate, capital market and pensions management: Lessons from Nigeria

Abstract

This paper examines empirically the causal relationship between interest rate, capital market, and pension assets in Nigeria from 1981-2013. While literature provides preponderant evidence of transmission from pension asset to capital market growth, little evidence is available of the reverse and the interaction with interest rate. The 2014 Pension Act widens the scope of pension fund investments into real estate and infrastructure markets, which hitherto are interest rate sensitive. Nigeria's high short-term interest rate regime attracts long-term funds and can make the capital market volatile, which might pose systemic risks to pension assets. Using ordinary least square (OLS) regression technique in a recursive system, the study reveals that pension asset is directly sensitive to stock market Index, while the index is inversely sensitive to short term interest rate, implying that the high short term interest rate regime might be inimical to building 'wholesome' pension assets of the capital market. The study suggests that monetary and fiscal authorities should manage short-term interest rate to optimal lower rate to attract pension assets to the capital market, making the capital market to operate at lower volatility conducive for bi-directional growth.

How Does Pension Funds Impact Stock Market Development? An Empirical Analysis from Nigeria Using ARDL Technique

“…Generally, large-cap stocks are considered the least volatile, and small caps the most volatile. The term market capitalization is sometimes used interchangeably with market value, in explaining how a particular index is weighted or where a company stands in relation to other companies (Eke & Onafalujo, 2015).…”