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EMPIRICAL ANALYSIS OF EXCHANGE RATE VOLATILITY AND NIGERIA STOCK MARKET PERFORMANCE
Abstract: Since 1993 Nigeria exchange rate started running beyond digit level as against United-state dollar amidst pursuance of growth of macroeconomic indicators. While available data show that growth in key macroeconomic indicators specifically exchange rate and inflation rate has impacted negatively on the growth of Nigerian stock market through GARCH process and ECM estimation techniques, interest rate was found to have impacted positively. This paper examined betweenexchange rate volatility and stock market performance using Generalised Autoregressive Conditional Heteroskedascity (1.1) (GARCH) model in establishing the relationship. A Vector Error Correction Model of stock market performance was estimated to examine the impact of exchange rate volatility. It was found from the available data spanning 1986 to 2013 that long run volatility in exchange rate has strong negative impact on the change in the performance of the Nigerian stock exchange market having proved the uni-directional relationship through pairwise granger causality test. The study recommends supporting fiscal policy and diversification to avoid subsequent external shocks because the main problem of Nigeria in the international market is its heavy dependence on oil and that manufacturing firms should produce quality goods that attract international patronage in order to have monetary and exchange rate control and remote causes should also be addressed like providing enabling business environment friendly atmosphere for domestic and foreign investors.
Keywords: Exchange rate, Market Capitalisation, Inflation rate and Interest rate