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Analysis of the Effect of Oil Price Shock on Industry Stock Returns in Nigeria

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  • MAGNUS ABENG

Abstract

This study focus on the impact of oil price fluctuation on the sector level activities of the stock market in Nigeria. Five industry sectors were examined based on availability of data while included macroeconomic factors were selected guided by economic theory and existing literature. Study results suggest that changes in oil prices significantly affect stock returns of all the sectors, except food beverages and tobacco. Consistent with the findings of McSweeney and Worthington (2007) and Agusman and Deriantino (2008) for the Australian and Indonesian stock markets, respectively, the parameter estimates of market returns for the banking, insurance, food beverages and tobacco, oil and gas and industrial sectors significantly exceeded unity, suggesting a high risk exposure of these sectors vis-à-vis market returns. The food beverages and tobacco and oil and gas sectors exhibit significantly negative sensitivity to exchange rate risk, indicating the debilitating effect of the depreciation of the domestic currency on the returns of these sectors. The implications are enormous. First, the negative response of all sectors to exchange rate movement calls for prudent management of reserves plus informed and timely intervention in the market by the monetary authority to keep the rate stable. Secondly, the insensitivity of the food beverages and tobacco to oil price movement is an indication of the inefficiency instituted by the subsidy on petroleum products that insulate domestic consumption from market fundamentals. Subsidies distort the efficient allocation of resources by the market and in the case of Nigeria abet and aid corruption. Industry studies are very limited for developing countries. most studies are aggregate in analysis and concentrates on advanced economies. Nigeria has a peculiar nature of being crude oil export as well as a importer of refined petroleum products. This study focused on exploring the implications of oil price change on decomposed stock returns in the Nigerian stock exchange. Specifically, the study intend to determine whether oil price uncertainty increases investment risks in industry sectors; determine the magnitude and direction of the impact; and ascertain the existence of spillovers among the selected industry sectors in the market. Structural vector autoregression (SVAR)technique 1. OIL PRICE UNCERTAINTY AFFECT INDUSTRY SECTOR PERFORMANCE 2. MONETARY POLICY IS EQUALLY INFLUENCED 3. MARKET RISK IS DETERMINED

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  • Magnus Abeng, 2016. "Analysis of the Effect of Oil Price Shock on Industry Stock Returns in Nigeria," EcoMod2016 9285, EcoMod.
    • Handle: RePEc:ekd:009007:9285
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    Cited by:

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    Keywords

    Nigeria; Agent-based modeling; Agent-based modeling;
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