Money and Foreign Exchange Markets Dynamics in Nigeria: A Multivariate GARCH Approach

Abstract

This study examines money market and foreign exchange market dynamics in Nigeria by estimating the dynamic correlation and volatility spillovers between Nigeria Naira/US Dollar Bureau De Change (BDC) exchange rate and interbank call rate with data from January 2007 to August 2019. The study employs a dynamic conditional correlation form of GARCH model (DCC-GARCH) to access the nature of correlation, while an unrestricted bivariate BEKK-GARCH (1, 1) form of multivariate GARCH model is utilized to investigate shocks and volatility spillover of the rates. The estimated DCC-GARCH (1, 1) reveals that interest rate and exchange rate are dynamically linked negatively, suggesting that exchange rate (or interest rate) is inversely sensitive to interest rate (or exchange rate) in Nigeria. This result was substantiated by the estimated BEKK-GARCH(1, 1) model. Furthermore, the effects of news (shocks spillover) are bi-directional across the markets. However, volatility spillover is unidirectional, from exchange rate to interest rate, suggesting that, calming the volatility in foreign exchange market does guarantee moderation of volatility in the money market, whereas the reverse is not the case. The results underscore the growing influence of foreign exchange market in the financial space of the Nigerian economy. Thus, the study recommends that foreign exchange policies aimed at maintaining exchange rate stability should be sustained, having found exchange rate to be more effective in moderating interest rate volatility in Nigeria.

An Appraisal that Religion on its Own Does Not Breed Violence

“…It is important to recognize that religious intolerance has influenced the way many Nigerian Muslims and Christians think, leading them to fiercely oppose anything that appears to contradict their beliefs which will in turn leads to religious violence [19]. Some of the religious violence can be avoided if there is respect for other people beliefs and doctrine.…”

On the use of ARIMA and GARCH in Modelling Nigeria’s Naira: Us Dollar Monthly Exchange Rates

“…Adepoju, Yaya, and Ojo [13] applied "variants of GARCH models under non-normal innovations-t-distribution and Generalized Error Distribution (GED) on selected Nigeria exchange rates and found that the Asymmetric GARCH model with t-distribution and Generalized error distribution are selected in most cases and both distribution showed evidence of leptokurtic in Naira -USD exchange rate". Atoi and Nwambeke [14] examines "money market and foreign exchange market dynamics in Nigeria by estimating the dynamic correlation and volatility spillovers between Nigeria Naira/US Dollar with data from January 2007 to August 2019 and found that the dynamic conditional correlation GARCH (1, 1) and Baba, Engle, Kraft and Kroner GARCH (1,1) were the best model for estimating the dynamic correlation and volatility spillovers between Naira and USD Bureau De change and interbank call rate".…”

On the use of arima and garch in modelling nigeria’s naira – us dollar monthly exchange rates

“…Adepoju, Yaya, and Ojo (2013) applied variants of GARCH models under non-normal innovations-tdistribution and Generalized Error Distribution (GED) on selected Nigeria exchange rates and found that the Asymmetric GARCH model with t-distribution and Generalized error distribution are selected in most cases and both distribution showed evidence of leptokurtic in Naira -USD exchange rate. Atoi and Nwambeke (2021) examines money market and foreign exchange market dynamics in Nigeria by estimating the dynamic correlation and volatility spillovers between Nigeria Naira/US Dollar with data from January 2007 to August 2019 and found that the dynamic conditional correlation GARCH (1, 1) and Baba, Engle, Kraft and Kroner GARCH (1,1) were the best model for estimating the dynamic correlation and volatility spillovers between Naira and USD Bureau De change and interbank call rate. Therefore, the goal of this paper is to fit a time series models (ARIMA and GARCH models) for the average official Naira/US Dollar exchange rates.…”