Dynamic response of emerging market stock returns to exchange rate and oil price: a case of Nigeria

Joel Ede Owuru and Olabode Eric Olabisi
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Joel Ede Owuru: Augustine University,Ilara-Epe,Lagos State,Nigeria
Olabode Eric Olabisi: Elizade University,Ilara-Mokin,Ondo State,Nigeria

Romanian Journal of Economics, 2023, vol. 57, issue 2(66), 114-130

Abstract: Background: The share market is acknowledged as a pivotal subset of the larger financial market for trading financial assets, which is believed to be a catalyst for economic growth in the economy. However, various fundamental economic dynamics, especially the oil price and exchange rate, affect the overall behavior of returns to investors in the stock market. Nigeria has crude oil as its major export commodity in the international market, and in view of the recent global economic downturn that is linked to the COVID-19 pandemic, the petroleum cost has been plummeting along with the worsening exchange rate. Objective: This investigation explored the effects of fluctuations in oil prices and currency exchange rates on stock market yields in Nigeria. Method: Monthly information on crude oil cost, naira/dollar conversion rate, and the overall share index of Nigerian Stock Exchange (NSE) were acquired from the US Energy Information Administration encompassing the timeframe from January 2000 to September 2020 and estimated through the ARDL model. Results: We found that (i) The ARDL boundary examination indicated a sustained association among the variables examined in the investigation. (ii) A 1% escalation in oil prices would probably induce a 15.5% rise in stock returns in the short term and a 23.7% increase in the long term. (iii) A 1% devaluation of the naira/dollar exchange rate would reduce short-term stock market returns by 0.16%, whereas in the long term, an inconsequential adverse impact of the exchange rate on stock market returns was identified. Originality: Noteworthy for its unique contribution, this study stands out as one of the few empirical examinations exploring the tripartite relationship among stock market returns, prices of crude oil, and currency exchange rates in Nigeria. Using high-frequency data, the study effectively captures both the short-run and long-run effects of oil price changes and exchange rate fluctuations on stock market returns.

Keywords: stock market returns; oil price; exchange rate; ARDL model; Nigeria (search for similar items in EconPapers)
JEL-codes: C32 G12 G14 Q4 (search for similar items in EconPapers)
Date: 2023
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