Stock Market and Exchange Rate Interactions in Nigeria: A Cointegration with Structural Break Analysis.
- November 7, 2020
- Posted by: RSIS Team
- Categories: Banking & Finance, IJRISS
International Journal of Research and Innovation in Social Science (IJRISS) | Volume IV, Issue X, October 2020 | ISSN 2454–6186
Kenechukwu J. Nwisienyi1, Onyeka A. Obi2
1 ,2School of Financial Studies, Department of Banking and Finance,Federal Polytechnic Oko, Anambra State Nigeria
Abstract : The study investigated the relationship between stock market movement and exchange rate in Nigeria using a monthly time series data for the periods 2008M1 to 2019M12. The Lee Strazicich (2003) LM unit root test and the Hatemi-J (2008) cointegration test, all allowing for the presence of more than one endogenously determined structural break, were applied to examine the stationarity and the long-run relationship of the variables respectively. The result showed the presence of two structural breaks in 2009M11 and 2011M2 following the Zt statistics of the Hatemi J. cointegration test and that there is no cointegration among the variables as reported by all the test statistics (ADF, Zt and Za) of the same cointegration test. The short-run model shows a statistically significant positive relationship between the stock market and exchange rate at lag 2 which indicates that the impact of short-run exchange rate movements of previous 2 months has a significant impact on the Nigerian stock market returns. All other variables are not influential in the short run as they returned statistically insignificant. Finally, the Pairwise Granger causality test showed no form of directional causality amongst the variables. This negates the flow and stock-oriented models.
Keywords— Stock Market, Exchange Rate, Structural Breaks, Hatemi-J Cointegration, Lee Strazicich Unit Root, Flow Oriented Model, Stock Oriented Model, Granger Causality.
I. INTRODUCTION
Government, policymakers, and industrialists have, over the years, maintained keen interests in the capital market and its dynamism. This is mostly because the capital market is seen as one of the drivers of the economy. [1] opines that one of the policy objectives of the monetary regulatory authority in each economy is the development and stability of the capital market given the financial sector’s contribution towards attaining long-run growth.
According to [7], the important benefit derivable from the stock market to all economic agents is the provision of long-term, non-debt financial capital for development in all facets. The stock market plays a very prominent role in shaping a country’s economic and political development. As evidenced in the recent global financial meltdown, a collapse of the stock market would trigger a financial crisis and economic recession [19].
