Stock Market Response to Exchange Rate in Nigeria

Abstract

This study seeks to determine the response of Nigeria stock market to fluctuations in exchange rate. The stock market is decomposed into Market Capitalization, All Share Index, and Volume of Transactions. Secondary data were obtained from the Central Bank of Nigeria (CBN) statistical bulletin and the World Development Index (WDI) covering the period under study (2002-2020) for this study. The analytical technique used was Ordinary Least Squares (OLS) multiple regression analysis with series of preliminary and diagnostic tests. The findings revealed that the Real Exchange Rate has a positive and significant impact on Market Capitalization while it demonstrated a negative and significant effect on All Shares Index and Volume of Transactions of the Nigerian stock market. The study concludes that it is important to regulate and stabilize the exchange rate to achieve impressive growth and performance in the Nigerian stock market. The study recommends that the Federal Government should focus on revamping other sectors of the economy, enact policies to discourage importation of certain goods and services, and create an enabling environment to encourage the production and exportation of goods and services which would save the country's foreign reserves and reduce high and adverse exchange rates. The study however suggests that stable and appreciating exchange rates are crucial for impressive and predictable stock market performance in Nigeria.