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NIGERIAN JOURNAL OF CONTEMPORARY PUBLIC POLICY

Year: 2014|   Volume No: 10|   ISSN: 0795-0330|   Page No: 5


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Title:  RELATIONSHIP BETWEEN EXCHANGE RATE VOLATILITY AND STOCK MARKET PRICES IN NIGERIA: AN EMPIRICAL INVESTIGATION

SULIEMAN SA’AD & ABBA, MOHAMMED

DEPARTMENT OF ECONOMICS,  NIGERIAN DEFENCE ACADEMY,  PMB 2109,KADUNA, NIGERIA  

 

ABSTRACT

The paper evaluates the relationship between exchange rate volatility and stock market prices in Nigeria, over the period 1985 to 2014, using Generalized Autoregressive Conditional Heteroskedasticity,(GARCH) technique, the Johansen Co-integration and Error Correction Mechanism (ECM).The GARCH result showed that, exchange rate and inflation rate constitute significant sources of volatility to stock prices in both the short-run and long-run, with coefficients: 0.33 and 0.32 of variations in NSE-All Share Index respectively. This was followed by the broad money supply with positive coefficient; 0.19 while, real interest rate has a negative coefficient: 0.35. The ECM result showed that, there exists a long-run co-integration or equilibrium relationship among the variables. Therefore, the paper recommended that, monetary authority should first, embarked on tight exchange rate policy measures through the consistent applications of Dutch Auction System (DAS) to serve the triple purposes of reducing the parallel market premium, conserve the dwindling external reserves and achieve a realistic exchange rate for the Naira per US dollar. This will help to stabilize the Naira exchange rate in Nigeria.  

 

 

SUMMARY:

In Nigeria, the relationship between exchange rate volatility and stock market prices plays a significant role during the period of the study. The study therefore, recommended that, there should be a clear the distinction between short-run and long-run exchange rate policy objectives by the monetary authority. For short-run objectives such as controlling volatility of exchange rate and inflation rate. The CBN can embark consistent applications Dutch Auction System (DAS) to serve the triple purposes of reducing the parallel market premium, conserve the dwindling external reserves and achieve a realistic exchange rate for the Naira. The DAS will help to stabilize the naira exchange rate, reduce the widening premium, conserve external reserves, and minimize speculative tendencies of authorized dealers. This can be achieved through prompt deployment of monetary control instruments in support of the DAS as well as restricting the excessive use of US dollar in domestic transactions, thus assuring a steady supply of foreign exchange. The DAS if allowed to stay and work properly could significantly reduce or eliminate exchange rate volatility and ensure stability in stock market prices.   

Correspondence:

Department of Economics,  Nigerian Defence Academy,  PMB 2109,Kaduna, Nigeria 


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