Abstract
The study examines the asymmetric effect of oil price on the exchange rate and stock price using the Nonlinear Autoregressive Distributive Lag (NARDL) technique on the time-series data spanning from January 1996 to September 2020. The multivariate cointegration test showed evidence of a long-run relationship among the stock price, exchange rate, and oil price. The linear Granger causality test showed that stock price is granger caused by oil price and exchange rate, and oil price is granger cause by stock price and exchange rate. The nonlinear granger causality showed evidence of nonlinearity using the BDS test. The Dick-Panchenko non-parametric and nonlinear Granger causality test in a contrary to the linear Granger causality test showed a unidirectional nonlinear causality from exchange rate to stock price at 10% level, and from oil price to exchange rate at 1% and 10% levels respectively. The result from the nonlinear ARDL revealed that change in oil price impacted asymmetrically on the exchange rate and stock price both in the short-run and long-run. The study recommends that the revenue generated from increasing oil price should be used for developing and reinstalling decayed infrastructure and oil-exporting countries should develop mechanisms and strategies that will ensure fair stability in the capital markets irrespective of the shocks in oil price.
Highlights
Nigeria is the world’s tenth producer and largest reserve of global oil
This study empirically investigates the impact of oil prices on the exchange rate and stock prices in Nigeria
The linear Granger causality test showed that stock price is granger caused by oil price and exchange rate, and oil price is granger cause by stock price and exchange rate
Summary
Nigeria is the world’s tenth producer and largest reserve of global oil. Before the discovering of oil in 1958, it has been the highest and major source of revenue accounting for about 90% of total export and not less than 70% of total revenue as well as the most contributors of gross domestic product in Nigeria (Madugba et al, 2016). Downward fluctuation in oil price reduces the price of non-traded goods, reduces real exchange rate and nominal exchange rate depreciation, falls stock prices, causes an imbalance in the current account, reallocation of the portfolio, reduction in foreign reserve, and stunted growth in GDP or otherwise. In the absence of factors of production substitution, increasing oil prices rises the cost of doing business and reduces the profits of non-oil companies. This is passed on to consumers in terms of higher prices which reduces demand for final goods and services, reduce profits. The policy-makers see rising oil prices as inflationary and the central banks respond to its pressures by raising interest rates which affect the discount rate used in the stock pricing formula
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