Real Exchange Returns and Real Stock Price Returns in Nigeria: An Econometrics Analysis of the Direction of Causality

Adewumi Otonne, Terzungwe Usar and Adebayo Adereni
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Adewumi Otonne: University of Ibadan, Ibadan Nigeria
Terzungwe Usar: University of Ibadan, Ibadan Nigeria
Adebayo Adereni: Access Bank Nigeria PLC

International Journal of Economics and Financial Research, 2018, vol. 4, issue 5, 131-144

Abstract: This paper examined the causal relationship between real exchange rate returns and real stock price returns in Nigeria from January 1985- June 2017. For the investigation the VAR/pair-wise granger causality test and Sims-causality test were applied. From the evidences shown, there exist a unidirectional causal relationship between real exchange rate returns and real stock price returns. Causality running from Real exchange rate returns to real stock price returns. Thus, the past values of REXR can influence/predict the present value of RSPR. This confirms the findings of Olugbenga (2012) and the proposition of the flow oriented model. Also, evidences from the sims-Causality test show that there is uni-directional causality running from Real exchange rate returns to real stock price returns. Thus, the present value of REXR can influence/predict the future values of RSPR. Therefore, it is important for the monetary authority of Nigeria to put into due consideration the exchange rate policy in its conduct of monetary policy internally. Investors could also use these findings as an effective tool in stock trading. As movement in the foreign exchange market (real exchange rate returns) could have a great impact on the present and future movement of stock exchange market (real stock price returns) in Nigeria.

Keywords: Real exchange rate returns; Real stock price returns; VAR/pair wise causality test; Sims-causality test flow oriented model; Exchange rate policy; Monetary policy; Monetary authority; Stock trading; Foreign exchange market; Stock exchange market (search for similar items in EconPapers)
Date: 2018
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