Exchange Rate Volatility and Nigerian Stock Market Development

Abstract

Purpose: The study aims to evaluate the impact of exchange rate volatility on the indicators of stock market, such as the returns, capitalization, liquidity, transaction volume, based on the Nigerian evidence. Theoretical framework: The paper considers extant model of exchange rate-stock market interactions. Because the diversity of the market is important the paper follows suggestions by El-Wassal (2013) to examine variety of stock market indicators in order to offer accurate depiction of how the stock market drives exchange rate volatility. Design/Methodology/Approach: The study employs a simple static regression model of stock market indicators with autoregressive adjustment component which absorb autocorrelation. The models are tested on annual data (1985-2020). Findings: The study finds that the exchange rate volatility has negative impact on stock market development - returns, capitalization and volume. The paper reveals further that other correlated controls factors impinge different impacts on the stock market indicators. Research, Practical & Social implications: One implication of the finding is that the volatility may discourage investors, reduce firm performance, and lead to reduction on the returns of firm shares. Policy makers should put in place growth-inducing infrastructural investments to make the business environment more conducive to attract foreign capital, while also positioning the capital market with several initiatives to increase trading activities. Originality/Value: The connection between the foreign exchange and financial markets is of policy importance. Although the focus is on the Nigerian markets, the evidence could be extended to other African and global markets, to serve as guide to foreign investors.