JEFMS Journal

Google Scholar

Article Pdf

---

ABSTRACT:

This paper empirically investigates the impact of exchange rate fluctuations on Nigerian capital market performance by using yearly time series data during the period 1981–2022. We examined the long-run and short-run elasticities of variables using the bounds testing (ARDL) approach to cointegration. The results of the analysis show that exchange rate fluctuations negatively influence market capitalization, inflation consistently has a negative effect, and GDP shows a complex relationship with both positive and negative effects, suggesting initial gains followed by corrections. The effects of foreign direct investment (FDI) exhibit a range of outcomes, including notable negative consequences from previous investments. The paper concludes that the findings indicate that the negative impact of exchange rate fluctuations on market capitalization underscores the need for stable exchange rate policies. The government should promote GDP growth, lower exchange rate volatility, ensure stable inflation, attract foreign investment, rectify overvaluation, and establish a strong policy framework to maintain market performance and economic indicators.

KEYWORDS:

Market Performance, Exchange Rate Stability, Foreign Investment, Policy Framework, Nigeria

Jell Code:

E44,F31, F21, G18,O55

REFERENCES:

1) Adedeji, G. (2023). Exchange rate volatility and Nigerian stock market development. Business Review, 8(9), e03078. https://doi.org/10.26668/businessreview/2023.v8i9.3078.

2) Bhargava, V. and Konku, D. (2023). Impact of exchange rate fluctuations on US stock market returns. Managerial Finance, doi: 10.1108/mf-08-2022-0387.

3) Brown, R. L., Durbin, J. & Evans, J. M. (1975). Techniques for testing the constancy of regression relations over time. Journal of the Royal Statistics Society, 37, 149-192

4) CFA Journal. (2024). Interest Rate Parity. Retrieved from https://www.cfajournal.org/interest-rate-parity/

5) EconomyWatch. (2021). Monetary Approach to Exchange Rate Determination. Retrieved from https://www.economywatch.com/monetary-approach-to-exchange-rate-determination.

6) Ewubare, D. B., Chukwu, E. S., & Ezekwe, C. I. (2022). Exploring the role of exchange rate in driving market capitalization in Nigeria. Saudi Journal of Economics and Finance, 6(6), 200-207. https://doi.org/10.36348/sjef.2022.v06i06.002.

7) Eyung, E. I., Aben, A. F., & Chukwuebuka, O. J. (2021). Exchange rate fluctuation and Nigeria’s economic growth. Journal of Contemporary Issues in Accounting (JOCIA), 2(1). Retrieved from https://journals.unizik.edu.ng/jocia.

8) Fapetu, O., Ojo, S. M., Balogun, A. A., & Asaolu, A. (2022). Capital market performance and macroeconomic dynamics in Nigeria. arXiv. https://doi.org/10.48550/arXiv.2207.00773

9) Forexcentral. (2024). Asset market model applied to forex. Retrieved from https://www.forex-central.net/asset-market-model-applied-to-forex.php.

10) Gnagne, P. X., & Bonga-Bonga, L. (2020). The impact of exchange rate volatility on the security markets in BRICS economies. Economia Internazionale / International Economics, 73(1), 21-50.

11) Gokmenoglu, K. K., Eren, B. M., and Hesami, S. (2021). Exchange rates and stock markets in emerging economies: New evidence using the Quantile-on-Quantile approach. Journal of Quantitative Finance and Economics, 5(1), 94-110. https://doi.org/ 10.3934/QFE.2021005.

12) Iheanachor, N., & Ozegbe, A. E. (2021). The consequences of exchange rate fluctuations on Nigeria's economic performance: An autoregressive distributed lag (ARDL) approach. International Journal of Management, Economics and Social Sciences (IJMESS), 10(2-3), 68-87. https://doi.org/10.32327/IJMESS/10.2-3.2021.5.

13) InfoGuide Nigeria. (2024). 10 Challenges Facing Investors in the Nigerian Capital Market. Retrieved from
https://infoguidenigeria.com/challenges-facing-investors-nigerian-capital-market
/#:~:text=10%20Challenges%20Facing%20Investors%20in%20the%20Nigerian%20Capital,
...%208%208.%20Bad%20policy%20...%20More%20items.

14) Investopedia. (2023). International Fisher Effect (IFE). Retrieved from https://www.investopedia.com/terms/i/ife.asp.

15) Investopedia. (2024). Interest Rate Parity (IRP). Retrieved from a. https://www.investopedia.com/terms/i/interestrateparity.asp

16) Investopedia. (2024). Purchasing Power Parity (PPP). Retrieved from a. https://www.investopedia.com/updates/purchasing-power-parity-ppp/

17) Jibrin, D., Terfa, W., & Abraham. (2017). Effect of exchange rate returns on equity prices: Evidence from South Africa and Nigeria. International Journal of Economics and Finance, 9(11), 35-47. https://doi.org/10.5539/IJEF.V9N11P35.

18) Khan Academy. (2024). The Foreign Exchange Market Model. Retrieved from https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/ap-macro-resources-and-exam-preparation/every-graph-used-in-ap-macroeconomics/a/the-foreign-exchange-market-model.

19) Krugman, P. R., & Obstfeld, M. (2017). International Economics: Theory and Policy. Pearson Education.

20) Manu, K. S., & Bhaskar, P. (2018). Effect of exchange rates volatility on stock market performance. Asian Journal of Management, 9(4), 1337-1341. https://doi.org/10.5958/2321-5763.2018.00212.3.

21) Nairametrics. (2022, December 28). Recap: 5 outstanding developments that defined Nigeria’s capital market in 2022. Retrieved from https://nairametrics.com/2022/12/28/recap-5-outstanding-developments-that-defined-nigerias-capital-market-in-2022/.

22) Obura, J., & Anyango, C. (2016). Moderating effect of interest rates on the relationship between foreign exchange rate fluctuation and performance of Nairobi Securities Exchange Market. Universal Journal of Accounting and Finance, 4(2), 27-34. http://www.hrpub.org. https://doi.org/10.13189/ujaf.2016.040201.

23) Oxford Business Group. (2023). Capital markets chapter. In the report: Nigeria 2023. Retrieved from https://oxfordbusinessgroup.com/reports/nigeria/2023-report/capital-markets-chapter/

24) Pesaran, M. H., & Shin, Y. (1999). An autoregressive distributed lag modelling approach to cointegration analysis. In S. Strom (Ed.), Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium (Chapter 11). Cambridge University Press.

25) Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326.

26) Sargan, J. D. (1964). Wages and prices in the United Kingdom: A study in econometric methodology, 16, 25–54. In Econometric Analysis for National Economic Planning, ed. by P. E. Hart, G. Mills, and J. N. Whittaker. London: Butterworths.

27) Securities and Exchange Commission Nigeria. (2015). Opportunities in the Nigerian Capital Market. Retrieved from https://sec.gov.ng/wp-content/uploads/2015/10/Opportunities-in-the-Nigerian-Capital-Market.pdf

28) Taylor, M. P., Wang, Z., & Xu, Q. (2021). The real effects of exchange rate risk on corporate investment: International evidence. Journal of International Money and Finance, 117, 102432. https://doi.org/10.1016/j.jimonfin.2021.102432.

29) Uguru, N. E., Enwere, G. M., & Amos, W. (2024). The Nexus Between Exchange Rate Volatility and Nigerian Stock Prices: An Egarch Approach. African Journal of Economic and Sustainable Development, 7(1), 56-72. DOI: 10.52589/AJESD-ATAK411M. License: CC BY-NC-ND 4.0.

30) Umoru, D., Effiong, S. E., Umar, S. S., Okpara, E. U., Iyaji, D., Oyegun, G., Iyayi, D., & Abere, B. O. (2022). Exchange rate volatility transmission in emerging markets. Corporate and Business Strategy Review, 4(2), 37-47. https://doi.org/10.22495/cbsrv4i2art4.