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Stock Prices and Exchange Rate Interactions in Nigeria: An Intra-Global Financial Crisis Maiden Investigation

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  • Aliyu, Shehu Usman Rano

Abstract

This paper examined the long run and short run interactions between stock prices and exchange rate in Nigeria based on a sample from 1st February, 2001 to 31st December, 2008. Three models were derived from the sample, albeit pre-crisis, crisis and basic models. The paper set out by testing the time series properties of the series using the ADF and PP tests. In addition, the Engle and Granger two-step and Johansen and Juselius cointegration procedures were applied. Empirical results showed that all the series are I(1) and evidence of cointegration was established using the Johansen and Juselius methodology. Furthermore, causality tests revealed strong evidence of long run bidirectional relationship between stock prices and exchange rate in the models. Policy wise, the findings implied that monetary authorities in Nigeria are not constrained to take into account stock market development in achieving their exchange rate policy objective given the symbiotic nature of relationship between the two. The paper recommends measures that would promote greater stability and efficiency of the Nigeria’s foreign exchange market

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13283.

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Date of creation: 04 Feb 2009
Date of revision: 09 Feb 2009
Handle: RePEc:pra:mprapa:13283

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Keywords: Stock prices; exchange rate; Granger causality; cointegration and vector error correction;

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References

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  1. Stavarek, Daniel, 2004. "Stock Prices and Exchange Rates in the EU and the USA: Evidence of their Mutual Interactions," MPRA Paper 7297, University Library of Munich, Germany.
  2. Giovannini, Alberto & Jorion, Philippe, 1987. "Interest rates and risk premia in the stock market and in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 6(1), pages 107-123, March.
  3. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
  4. Issam Abdalla & Victor Murinde, 1997. "Exchange rate and stock price interactions in emerging financial markets: evidence on India, Korea, Pakistan and the Philippines," Applied Financial Economics, Taylor & Francis Journals, vol. 7(1), pages 25-35.
  5. Kim, Ki-ho, 2003. "Dollar exchange rate and stock price: evidence from multivariate cointegration and error correction model," Review of Financial Economics, Elsevier, vol. 12(3), pages 301-313.
  6. Solnik, Bruno, 1987. " Using Financial Prices to Test Exchange Rate Models: A Note," Journal of Finance, American Finance Association, vol. 42(1), pages 141-49, March.
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Cited by:
  1. Aliyu, Shehu Usman Rano, 2011. "Reactions of stock market to monetary policy shocks during the global financial crisis: the Nigerian case," MPRA Paper 35581, University Library of Munich, Germany, revised 28 Dec 2011.

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