Asymmetric reactions of stock prices and industrial output to exchange rate shocks: Multiple threshold nonlinear autoregressive distributed lag framework

Abstract

Motivated by swings in the exchange rate of many developing economies which exert influence on firms? input costs, output, stock prices, and profits, the study investigated the asymmetric reactions of stock prices and industrial output to various shocks in the exchange rate in Nigeria using a multiple threshold nonlinear autoregressive distributed lag model and high frequency series from January 1999 to December 2021. Empirical results suggest that stock prices and industrial output react asymmetrically in the opposite direction to exchange rate depreciation. It further indicates that the reactions of both stock prices and industrial output to exchange rate changes are sensitive to the size of shocks. Exchange rate shocks above the 25th percentile significantly and inversely affect both stock prices and industrial output, and the effects of exchange rate shocks on stock prices and industrial output become pernicious if above the 75th percentile. The main economic implication of the empirical finding is that in the upper quantile, both exchange rate depreciation and appreciation hurt industrial output, and hence, stock values. Thus, the multiple threshold nonlinear autoregressive distributed lag results suggest that the reactions of both stock prices and industrial output to exchange rate changes are highly sensitive to the extent of the shocks.