Dynamic Relationship between Crude Oil Price, Exchange Rate and Stock Market Performance in Nigeria

Abstract

This study employed a multivariate Vector Error Correction Model (VECM) that uses the Granger causality test and generalized variance decomposition analysis to study the relationship between crude oil prices, exchange rate and stock market performance in Nigeria from January 1995 to December 2014. As expected from an oil exporting country, a short-run positive relationship is observed between the Nigerian stock market and crude oil prices and the direction is from crude oil prices to the Nigerian stock market but not the other way round. The short run relationship between exchange rate and Nigerian stock market is observed to be positive and the direction is from the exchange rate to the Nigerian stock market. Exchange rate is also observed to be positively related to the movements in the crude oil prices in the short run with the direction of causality running from crude oil prices to exchange rate. However, the results of a multi-variate Johansen cointegration test suggest the existence negative relationship among the three variables in long run. The Variance Decomposition analysis shows that the Nigerian stock market performance and Exchange rate behaviour are strongly influenced by the movements in Crude Oil prices.

The Dynamic Relationship between Crude Oil Prices and Stock Market Price Volatility in Nigeria: A Cointegrated VAR-GARCH Model

“…The conditional volatility of stock market price log return was found to be stable and predictable while that of crude oil price log return was found to be unstable and unpredictable although a dependable and dynamic relationship between crude oil prices and stock market prices was found to exist. The cointegration test result of this study agrees with the findings of [17,18,19,20] among others.…”

“…Results showed a significant link between oil prices and stock market performance in Nigeria. Iheanacho [19] conducted a study that employed a multivariate Vector Error Correction Model (VECM) which used Granger causality test and generalized variance decomposition analysis to study the relationship between crude oil prices, exchange rate and stock market performance in Nigeria from January 1995 to December 2014. The study found a short-run positive relationship between crude oil prices and the Nigerian stock market with the direction of causality running from crude oil prices to the Nigerian stock market.…”

The Influence of Oil Price Fluctuations on Stock Market of Developing Economies: A Focus on Nigeria

“…Various studies on the effect of crude oil price fluctuation on the stock market in Nigeria show mixed results. For instance, Omisakin et al (2009), Mordi et al (2010), Abbas and Terfa (2010), Adebiyi et al This Journal is licensed under a Creative Commons Attribution 4.0 International License (2010), Akomolafe and Danladi (2014), Akinlo (2014), Iheanacho (2016), Lawal et al (2018), Soyemi et al (2017), Ojikutu et al (2017), Obi et al (2018) observe a positive effect of oil price shock on the stock price. On the contrary, studies like Adaramola (2012) and Effiong (2014) reported an inverse correlation between the price of oil movements and returns from stocks.…”

Dynamic links between the Nigerian equity market and those of selected regional and developed countries

“…(2015) , Uwubanmwen and Omorokunwa (2015) , Lawal et al. (2016) , Iheanacho (2016) , Mroua and Trabelsi (2019) , and Manasseh et al. (2019) .…”