Oil Price and Stock Market Nexus in Nigeria: An Asymmetric Cointegration Based on Non-Linear Ardl Approach

Abstract

This paper examined the asymmetric nexus between oil price and stock prices in Nigeria using nonlinear autoregressive distributed lag model (NARDL) to capture both long-run and short-run asymmetric relations. To achieve this, monthly time series data from 2014m1 to 2023m6 were gathered from the Central Bank of Nigeria (CBN) and the Nigeria Exchange Group (NGX). The estimation results confirmed the existence of both long-run and short-run asymmetry behaviour of stock prices in Nigeria. Precisely, in the long-run, interest rate, exchange rate and oil price increase tend to increase stock price levels in Nigeria. Similarity, in the short-run, only oil price increase seems to increase stock prices while oil price decrease seems to decrease stock prices in Nigeria. Furthermore, the empirical findings from asymmetric effect show that negative changes in exchange rate fell sharply due to decrease in oil price which further translate to stock price, suggesting the existence of feed backs from oil to stock markets. The paper recommends that investors should invest in Nigerian stock market in that a hike in oil price leads to appreciation in domestic currency, which translate to appreciation in stock price in Nigeria and vice versa. This suggests that investment in stock market can be used as a tool to ease the domestic currency pressure to a sustainable level. Hence, the need to maintain stable oil prices cannot be overstressed.