Empirical Analysis on the Applicability of the Term Structure of Interest Rate Theory in Nigeria

Abstract

This study tested the applicability of the term structure theory of interest rates in Nigeria for the period between 1976 and 2013. This was done by focusing on the expectations theory to determine if it has been valid. In order to accomplish the set out objectives, this paper was split into pre SAP and post SAP analysis. Bearing this in mind, two research hypotheses (H_o1 - H_o2) were formulated which were tested using two analytical techniques. These are the Augmented Dickey Fuller (ADF) Unit Root Test and the Vector Auto Regression Test. Based on the results gotten, H_o1 was accepted and H_o2 was rejected. This implied that the expectations theory was not valid before the advent of SAP. The period after SAP however showed that the expectations theory was valid. The study ended by recommending that monetary policy makers should be more transparent and stable in their activities so as to make the policies more predictable. This would be in the interest of the Nation at large.

Keywords: Term structure theory, expectations theory