Read Online

Download PDF (EN)

Abstract

This study examines the impacts of exchange rate on stock prices in Nigeria using the Vector error correction model (VECM), and granger causality approaches for the period between 1980 and 2018. The magnitude of the estimated coefficients shows that the exchange rate has a significant but negative impact on stock prices. The VECM results also show that the speed of adjustment of about 8.5% of the previous period’s disequilibrium in the stock exchange market is corrected annually. This indicates that it takes some years for any disequilibrium in the stock market to spread to the foreign exchange market. The granger causality test shows that the direction of causality between stock prices and exchange rate runs from exchange rate to stock prices. This implies that appreciation (depreciation) in the exchange rate leads to an increase (decrease) in stock prices in Nigeria. As a policy option, policymakers in Nigeria should be interested in a more stable exchange rate policy. Also, economic reforms must target macroeconomic stability, removal of structural distortions and creation of a business-friendly environment to enhance domestic production capacity