The Nexus Between Exchange Rate Volatility and Nigerian Stock Prices: An Egarch Approach

Abstract:

The study examines the connection between exchange rate volatility and stock market performance in Nigeria from 1981 to 2022, utilizing the EGARCH model. Stock Exchange Capitalization and All-Share Index serve as indicators for the stock market. Stationarity tests initially showed a random walk in the variables, but after taking first differences, the ADF and PP unit root test statistics became significant, indicating integrated variables of the same order (I(1)). Analysis revealed autonomous negative reactions of stock prices to current year's exchange rate flux, indicating that the Nigerian Stock Exchange responded negatively to exchange rate fluctuations. It confirmed the existence of significant volatility persistence between stock prices and exchange rate flux in Nigeria, with a unidirectional relationship from exchange rate to stock market. In conclusion, findings suggest that investors should carefully examine the nature of exchange rate volatility and stock market prices to make informed investment decisions.