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Exchange rate dynamics and stock market performance in Nigeria: Evidence from a Nonlinear ARDL Approach

Mutiu Oyinlola () and Tirimisiyu Oloko

No 59, Working Papers from Centre for Econometric and Allied Research, University of Ibadan

Abstract: This study investigates asymmetry in the impact of exchange rate on the Nigerian stock market using Nonlinear ARDL model by Shin et al. (2014), and it is the first study to do so. From the trend review, changes in the dynamics of exchange rate - stock market relationship was noticed, and this was accounted for using Bai and Perron (2003) multiple structural breaks test. Empirical findings from this study reveal that there is long run but no short run exchange rate asymmetry effect on the Nigerian stock market. Furthermore, the results suggest that banking sector recapitalization only affects the short run dynamics of stock – market exchange rate relationship. By implication, the Nigerian stock market adjust spontaneous or becomes more volatile after banking sector recapitalization. The policy implication from this study is that exchange rate policy cannot be used to correct short run disequilibrium in the Nigerian stock market, as it takes long term for the market to respond to changes in exchange rate. This is regardless of whether the policy being introduced is a revaluation or a devaluation policy.

Keywords: Exchange rate; Stock prices; NARDL; Asymmetry; Bank sector recapitalization; Nigeria (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2018-06
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