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

Author

Listed:
  • Joel Ede OWURU

    (Augustine University,Ilara-Epe,Lagos State,Nigeria)

  • Olabode Eric OLABISI

    (Elizade University,Ilara-Mokin,Ondo State,Nigeria)

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.

Suggested Citation

  • Joel Ede OWURU & Olabode Eric OLABISI, 2023. "Dynamic response of emerging market stock returns to exchange rate and oil price: a case of Nigeria," Romanian Journal of Economics, Institute of National Economy, vol. 57(2(66)), pages 114-130, December.
    • Handle: RePEc:ine:journl:v:57:y:2023:i:66:p:114-130
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    More about this item

    Keywords

    stock market returns; oil price; exchange rate; ARDL model; Nigeria;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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