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2021, Vol. 6, Issue 3, Part B

Interaction between stock market and exchange rate in Nigeria

Author(s): Ajibola, Isaiah Olufemi, Nweze, Obini Nwaze and Omotosho, Samson Babatunde

Abstract: The dynamics of exchange rate exhibits many challenges in international trade. These challenges make investments more difficult due to the danger that may emanate from increases in the exchange rate. However, this interaction has the tendency of increasing the business risk and the uncertainty of external transactions, which in most cases disposes a country to a related shock from exchange rate fluctuations. Incessant increase or hikes in crude oil prices causes a rise in inflation. The magnitude of this inflation partly depends on the degree of the labour market flexibility and the producer’s capacity to transfer the increases in cost to the consumers. the impact of rising or decreasing oil prices on economic activities and inflation depends also on policy responses and supply side effects (IMF, 2020). Evidence has shown that the Nigerian government spending before 2010 was below N0.5 trillion, but surge to N1.02 trillion and N1.5 trillion in 2016 and 2018 respectively while the figures for 2017 and 2019 stood at N4.04 and N6.45 trillion respectively. Similarly, the total imports by the oil sub-sector, accounts for an average of 22.4% between 2012 and 2014 in the Nigeria’s total visible trade. The continues decline in Nigerian Crude oil has caused a fall in foreign exchange earnings of the country especially in the case of mono product economy and consequently resulting to a fall in the capacity of the Central Bank of Nigeria (CBN) to fund foreign exchange market. The low level of foreign exchange reserve has induced free movement of exchange rate and as a result, it has implications on the demand side. Consequently, the increased foreign exchange demand in the face of unstable supply caused exchange rate volatility while the higher oscillation in oil price the more volatile the output in oil which in a way impacts the economy. Inversely, the current fall in oil price in Nigeria has affected the index and continuous depreciation of the local currency. In the light of the above, this research paper examined the effect of stock exchange and its interaction with exchange rate in Nigeria. This was done by considering 10 years horizon and the results show that in the short run 3.9% of the innovation in the stock market is due to its own past values and 91.18% is due to shocks to the oil price.

Pages: 132-137 | Views: 411 | Downloads: 12

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How to cite this article:
Ajibola, Isaiah Olufemi, Nweze, Obini Nwaze, Omotosho, Samson Babatunde. Interaction between stock market and exchange rate in Nigeria. Int J Stat Appl Math 2021;6(3):132-137.
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