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On the Nexus between Exchange Rate and Stock Price in Nigeria

Author

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  • Musa Ilias Biala
  • A.K. Oladejo

Abstract

Purpose: This paper investigates the nature and direction of the relationship between exchange rates and stock prices in Nigeria. Methodology: Autoregressive distributed Lag (ARDL) model was employed. While ARDL Bounds test was adopted to determine the short-run and long-run relationship between exchange rates and stock prices, Granger causality test was conducted to determine the direction of causality between the two variables. Time series data spanning 33 years were collected on stock prices, Nominal Exchange Rates (NER), Money Supply (MSS), and Interest Rates (INT) from the Central Bank of Nigeria (CBN) Statistical Bulletin and World Development Indicator (WDI). Findings: We provide empirical evidence that exchange rates, interest rates and the global financial crisis were negatively related to stock prices both in the short-run and long-run while the impact of money supply differs. The Granger causality test revealed a unidirectional causality running from stock prices to exchange rates in the long run. Practical implications: Nigerian authorities should adopt appropriate policies that will enhance the performance of the companies that are listed in the stock market so as to strengthen the exchange rate for Nigeria. Originality/value: The Nigerian stock market plays a significant role in the growth and development process of the Nigerian economy. Even so, the extent to which the stock market contributes to the Nigerian economic progress still depends on the behaviours of the foreign exchange rate. This has prompted researchers to investigate the relationship between stock prices and exchange rates. However, there has been lack of agreement on the nature and direction of the relationship.

Suggested Citation

  • Musa Ilias Biala & A.K. Oladejo, 2022. "On the Nexus between Exchange Rate and Stock Price in Nigeria," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 12(1), pages 80-99.
    • Handle: RePEc:ers:ijfirm:v:12:y:2022:i:1:p:80-99
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    References listed on IDEAS

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    1. Emeka Nkoro & Aham Kelvin Uko, 2016. "Exchange Rate and Inflation Volatility and Stock Prices Volatility: Evidence from Nigeria, 1986-2012," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 6(6), pages 1-4.
    2. Aliyu, Shehu Usman Rano, 2009. "Stock Prices and Exchange Rate Interactions in Nigeria: An Intra-Global Financial Crisis Maiden Investigation," MPRA Paper 13283, University Library of Munich, Germany, revised 09 Feb 2009.
    3. Gideon Boako & Maurice Omane-Adjepong & Joseph Magnus Frimpong, 2016. "Stock Returns and Exchange Rate Nexus in Ghana: A Bayesian Quantile Regression Approach," South African Journal of Economics, Economic Society of South Africa, vol. 84(1), pages 149-179, March.
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    5. Afees A. Salisu & Tirimisiyu F. Oloko, 2015. "Modelling spillovers between stock market and FX market: evidence for Nigeria," Journal of African Business, Taylor & Francis Journals, vol. 16(1-2), pages 84-108, January.
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    7. Dornbusch, Rudiger & Fischer, Stanley, 1980. "Exchange Rates and the Current Account," American Economic Review, American Economic Association, vol. 70(5), pages 960-971, December.
    8. Mutiu A. Oyinlola & Tirimisyu F. Oloko, 2018. "Exchange rate dynamics and stock market performance in Nigeria: Evidence from a Nonlinear ARDL Approach," Working Papers 059, Centre for Econometric and Allied Research, University of Ibadan.
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    More about this item

    Keywords

    Stock prices; all-share index; nominal exchange rate; Granger causality; Nigeria.;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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