Abstract
Given the observed volatility in crude oil prices in the international oil market and the role which oil and gas play in the Nigerian economy, this paper is an attempt to investigate the impact of crude oil prices and foreign exchange rate movements on stock market prices in Nigeria. In addition, the paper examined whether there is any volatility pass-through between the dollar price of Nigerian crude oil, foreign exchange rate of the Naira and stock market prices respectively. Data employed for the study are monthly values of the Nigerian Stock Exchange (NSE) All-Share Index (ASI), Dollar price of Nigerian Crude Oil (DPO) and the Official Exchange Rate of the Naira to the US Dollar (FXR) from January, 1985 to August, 2017. The methodology adopted for the study include the ADF unit root tests, Johansen co-integration tests, the ECM technique, Granger causality tests, variance decomposition as well as the GARCH(1,1) to model the volatility relationships among the variables. Findings reveal that there is one long-run dynamic co-integrating relationship among the variables ASI, DPO and FXR while the ECM results indicate that Crude oil price (DPO) significantly impact on Stock market prices. The Granger causality test reports a bi-directional causality relationship between ASI and DPO and a unidirectional causality running from FXR to ASI. The ARCH-GARCH volatility analysis demonstrates vividly that stock market prices in the NSE exhibit ARCH effect with a significant and positive first order ARCH term. The GARCH term is also positive and significant indicating that previous month’s stock market price volatility significantly influences current stock market volatility in the NSE. In addition, findings show that the volatility of dollar price of Nigerian oil (DPO) in the world oil market is significantly transmitted to the volatility of stock market prices in Nigeria. The pass-through effect of the volatility of exchange rate (FXR) to the volatility of stock market prices is also positive and significant. These findings offer significant informational signal to policy makers, portfolio managers/advisors and the investing public in achieving optimal asset and portfolio profile.
Highlights
Ever since the discovery of oil in Oloibiri, Nigeria on Sunday, 15th January,1956 and the coming on stream of its first oil field producing about 5,100 bpd in 1958, the oil and gas sector has continued to playa central role in the economic development of Nigeria and even in the current world economy
They estimated a bivariate vector autoregression (VAR)-GARCH-in-mean model and the results suggest that oil price volatility affects stock returns positively during periods characterized by demand-side shocks in all cases except the Consumer Services, Financials, and Oil and Gas sectors
This paper set out to investigate in the main the nature and extent of the relationship between crude oil prices and stock market prices in Nigeria with foreign exchange rate movements as a control variable
Summary
Ever since the discovery of oil in Oloibiri, Nigeria on Sunday, 15th January,1956 and the coming on stream of its first oil field producing about 5,100 bpd in 1958, the oil and gas sector has continued to playa central role in the economic development of Nigeria and even in the current world economy. The authors employed vector autoregression (VAR) model using daily observations of Brent crude oil prices and Istanbul Stock Exchange National Index (ISE-100) returns for the period between January 2, 1990 and November 1, 2011 They tested the relationship between oil prices and stock market returns under global liquidity conditions by incorporating a liquidity proxy variable, Chicago Board of Exchange’s (CBOE) S&P 500 market volatility index (VIX), into the model. Further empirical research on sectoral impact of oil price volatility include the work by Caporale, Ali and Spagnolo (2015) in which the researchers investigated the time-varying impact of oil price uncertainty on stock prices in China using weekly data on ten sectoral indices over the period January 1997–February 2014 They estimated a bivariate VAR-GARCH-in-mean model and the results suggest that oil price volatility affects stock returns positively during periods characterized by demand-side shocks in all cases except the Consumer Services, Financials, and Oil and Gas sectors. The apriori theoretical expectation about the signs of the parameter coefficients are given as β1> 0 and β2
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