Nonlinear Dependence between Stock Prices and Exchange Rate in Nigeria

Effiong, Ekpeno L. (2016): Nonlinear Dependence between Stock Prices and Exchange Rate in Nigeria. Forthcoming in:

Abstract

This paper investigates the nature of dependence between stock prices and exchange rate in Nigeria for the period running from January 2000 to December 2015, which covers the boom, bust and recovery cycles that characterized the stock market. Both Granger causality test in mean and quantiles are used with the latter being more robust to non-normalities and non-linearity in the data. For the entire sample, the result shows a bi-directional dependence between stock prices and exchange rates. However, at sub-sample periods, the results show no dependence between stock prices and exchange rate during tranquil times but a one-way dependence from stock prices to exchange rate during the boom and bust as well as the recovery cycles. Overall, the evidence indicates the dominance of the portfolio balance effect with stock prices leading exchange rate. Hence, stabilizing the stock market is imperative for exchange rate management to minimize the transmission of systemic risk and contagion between both markets

• Item Type: MPRA Paper
• Language: English
• Keywords: Stock Prices; Exchange Rate; Granger Causality; Nigeria
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C21 - Cross-Sectional Models ; Spatial Models ; Treatment Effect Models ; Quantile Regressions; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial Markets; F - International Economics > F3 - International Finance > F31 - Foreign Exchange; G - Financial Economics > G1 - General Financial Markets

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