Abstract
There is a pool of techniques and methods in addressing dynamics behaviors in higher frequency data, prominent among them is the ARCH/GARCH techniques. In this paper, the various types and assumptions of the ARCH/GARCH models were tried in examining the dynamism of exchange rate and international crude oil prices in Nigeria. And it was observed that the Nigerian foreign exchange rates behaviors did not conform with the assumptions of the ARCH/GARCH models, hence this paper adopted Lag Variables Autoregressive (LVAR) techniques originally developed by Agung and Heij multiplier to examine the dynamic response of the Nigerian foreign exchange rates to crude oil prices. The Heij coefficient was used to calculate the dynamic multipliers while the Engel & Granger two-step technique was used for cointegration analysis. The results revealed an insignificant dynamic long-term response of the exchange rate to crude oil prices within the periods under review. The coefficient of dynamism was insignificantly in most cases of the sub-periods. The paper equally revealed that the significance of the dynamic multipliers depends greatly on external information about both market indicators which are two-way interactions. Thus, the paper recommends periodic intervention in the foreign exchange market by the monetary authorities to stabilize the market against any shocks in the international crude oil market, since crude oil is the main source of foreign exchange in Nigeria.
Highlights
There is a widespread argument that the fluctuation of the exchange rates in developing economies is the main source of economic instability (Babatunde, et al, 2010)
Since the volatility family is not suitable for modeling and forecasting the relationship between the Naira exchange rate to the US Dollar and international crude oil price in Nigeria, especially when considering daily averages since the conditions were not satisfied in the cases of exchange rates, the study followed the Lag Variables AutoRegressive (LVAR)(n, m) seemingly causal model proposed by Agung (2009) and, Ender (2004) multiplier to estimate the dynamic relationship between Nigeria exchange rate and international crude oil price
We summarize the result for unit root for international crude oil price and Nigerian foreign exchange rate to US dollar on table 3
Summary
There is a widespread argument that the fluctuation of the exchange rates in developing economies is the main source of economic instability (Babatunde, et al, 2010). The effects of exchange rates fluctuation on countries’ economy is driven significantly by the swing in the global prices of crude oil products and currencies of the major economic powers and trading partners of the world. Exchange rate is regarded as the primary channel through which the fluctuations of global oil prices traded in US dollars are transmitted to the real economy (Reboredo, 2012). Higher demand for FOREX in the presence of insufficient supply continues to mount pressures on the country's exchange rate.
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