Abstract
This article looked at the connection between exchange rate risk and financial sector performance in Nigeria using time series data from 2008Q1 to 20017Q4. The study employed Autoregressive Conditional Heteroskedasticity (ARCH), and Granger Causality tests as estimation techniques. Financial intermediation index was used as the dependent variable while risk from exchange rate, risk from consumer price index and risk from interest rate were used as the independent variables. The findings from the study showed that exchange rate risk (EXR) coefficient value was -0.276230 with p-value of 0.0000, implying that EXR was negative and significant to influence FII. The risk from financial intermediation index reveals a coefficient value of -5.213590 and the p-value of 0.000 implying that when financial intermediation index increases, volatility or risk reduces which means that financial intermediation index was not a risky variable which was significant during the study period. However, the study concluded that the shock from exchange rate moves at a negative and significant direction to financial intermediation index of the economy. It is also concluded that exchange rate and financial intermediation index does not have uni or bi-directional relationships between each other. It is recommended that the Government and the Apex Bank of Nigeria are encouraged to increase the stabilization measurement for exchange rate to cushion its risk and by so doing; this could improve financial sector performance.
Highlights
The exchange rate movement in the financial sector performance and other sectors of the economy cannot be belittled. Armitage, Wold and Weissle (2002) are of the view that exchange rate fluctuations endanger firms’ performance most especially financial institutions
The above model was re-modified into a time series, functional model where the financial performance was used as the dependent variable, and it was proxy with the Financial Intermediation Index (FII) of the shareholders’ equity while risk from exchange rate, risk form interest rate, and risk from consumer price index were used as the independent variables
This study studied the connection between exchange rate risk and financial performance in Nigeria
Summary
The exchange rate movement in the financial sector performance and other sectors of the economy cannot be belittled. Armitage, Wold and Weissle (2002) are of the view that exchange rate fluctuations endanger firms’ performance most especially financial institutions. Exchange rate risk has been seen a fundamental issue affecting every sector of the Nigerian economy. This risk arises from the untold fluctuation of foreign exchange. In the last quarter of 2015 to the first and period 1 & 2 of the second quarter of 2016, the Nigerian official exchange rate to Dollar was ₦197 after which oscillated in the period 3 of the second quarter to ₦283 It was ₦313 at the beginning of quarter 3 of 2016 which was later stabilized at ₦305 at the end of the quarter three to the fourth quarter
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