Empirics of Derivative Market and Business Cycle Risk in Nigeria

The derivative market is increasingly vital as a risk management tool for businesses and investors. However, its role in this era of exacerbating business cycle risks (BCRs) has been topical in contemporary time. This paper examined the derivative markets’ mechanics towards mitigating BCRs in Nigeria. Quarterly data on financial derivatives (FIND), market capitalization (MCA), monetary policy rate (MPR), and gross domestic product growth rate (GDPGR), with inflation (INF) as a control variable, were obtained from Nigeria’s Central Bank data site from Q1, 2011 to Q2, 2021. Autoregressive Distributed Lag model (ARDL) and Granger causality were applied to estimate the equation. The study’s findings suggest that market derivatives (FIND), market capitalization (MCA), and monetary policy rate (MPR) have a positive significant effect on output growth rate respectively in the long term. Unidirectional causality runs from GDPGR to FIND, which suggests that successive output growth can mitigate excesses of derivative risk taking. Overall, the study’s findings support the underlying Keynes theorizing that derivative instruments could promote aggregate demand and overall economic stability. The study recommends the development of financial derivative markets and creating a conducive regulatory environment that would promote economic stability and growth in Nigeria.