Modeling Short Run Relationship between Naira-USD Exchange Rate and Crude Oil Price in Nigeria

Abstract

The vector auto-regressive (VAR) model is one of the most successful, flexible, and easy to use models for the analysis of multivariate time series. It is a natural extension of the univariate auto-regressive model to a dynamic multivariate time series.The VAR model has proven to be especially useful for describing the dynamic behavior of economic and financial time series and for forecasting. It often provides superior forecasts to those from univariate time series models. The data used are monthlyobservations from January 2006 to October 2016 of Nigeria Crude Oil price and Naira to the dollar exchange rate. The VAR model was employed for modelling the data. The unit root test reveals that all the series are non-stationary at the level and stationary at first difference. The co-integration relations among the series indices were identified by applying Johansen’s cointegration test. The result of Johansen’s test indicates no existence of co-integration relation between the variables. The final result shows that a vector autoregressive (VAR) model of lag three with no co-integration equations best fits the data.