Foreign Exchange Rates Dynamics and Stock Market Performance in an Emerging Economy: Evidence from Nigeria

Abstract

This study focused on the connection between foreign exchange rates dynamics and stock market performance in Nigeria (1995 to 2021). The paper set out to examine the effects of foreign exchange rates movements on the stock market performance in Nigeria. The data for the study were obtained solely from the Central Bank of Nigeria statistical bulletin. The Naira-U.S Dollar, Naira-British Pounds, Naira-Euro, and Naira-Swiss Franc exchange rates were proxies for the foreign exchange rate dynamics, while stock market performance was represented by stock market capitalization. The vector error correction mechanism (VECM) and the Pairwise Granger Causality tests were employed to analyze the secondary data. Results revealed the existence of long run relationship between foreign exchange rate dynamics and stock market performances in Nigeria though with an insignificant impact. In addition, a uni-directional causality was observed running from market capitalization to naira US-dollar exchange rate among others. It was therefore concluded that foreign exchange rates dynamics have an insignificant impact on stock market performances in Nigeria. Thus, there is need to align Nigeria’s economic stabilization policies in order to effectively achieve currency stability (of the naira). Policies such as outright ban on importation of items that can be produced locally should be pursued vigorously. This will no doubt boost aggregate domestic demand for such products and also go a long way in enhancing the value of the naira and by extension stock market outlook in Nigeria.