Oil Price Volatility, Exchange Rate Movements and Stock Market Reaction: The Nigerian Experience (1985-2017)

  • Onyemachi Maxwell Ogbulu Department of Banking and Finance, Abia State University, Uturu, Nigeria
Keywords: Crude oil prices, Stock market price, exchange rates, Volatility, ARCH-GARCH, Variance decomposition.


Given the observed volatility in crude oil prices in the international oil market and the role which oil and gas play in the Nigerian economy, this paper is an attempt to investigate the impact of crude oil prices and foreign exchange rate movements on stock market prices in Nigeria. In addition, the paper examined whether there is any volatility pass-through between the dollar price of Nigerian crude oil, foreign exchange rate of the Naira and stock market prices respectively. Data employed for the study are monthly values of the Nigerian Stock Exchange (NSE) All-Share Index (ASI), Dollar price of Nigerian Crude Oil (DPO) and the Official Exchange Rate of the Naira to the US Dollar (FXR) from January, 1985 to August, 2017. The methodology adopted for the study include the ADF unit root tests, Johansen co-integration tests, the ECM technique, Granger causality tests, variance decomposition as well as the GARCH(1,1) to model the volatility relationships among the variables. Findings reveal that there is one long-run dynamic co-integrating relationship among the variables ASI, DPO and FXR while the ECM results indicate that Crude oil price (DPO) significantly impact on Stock market prices. The Granger causality test reports a bi-directional causality relationship between ASI and DPO and a unidirectional causality running from FXR to ASI. The ARCH-GARCH volatility analysis demonstrates vividly that stock market prices in the NSE exhibit ARCH effect with a significant and positive first order ARCH term. The GARCH term is also positive and significant indicating that previous month’s stock market price volatility significantly influences current stock market volatility in the NSE. In addition, findings show that the volatility of dollar price of Nigerian oil (DPO) in the world oil market is significantly transmitted to the volatility of stock market prices in Nigeria.  The pass-through effect of the volatility of exchange rate (FXR) to the volatility of stock market prices is also positive and significant. These findings offer significant informational signal to policy makers, portfolio managers/advisors and the investing public in achieving optimal asset and portfolio profile.


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How to Cite
Ogbulu, O. (2018). Oil Price Volatility, Exchange Rate Movements and Stock Market Reaction: The Nigerian Experience (1985-2017). American Finance & Banking Review, 3(1), 12-25. Retrieved from https://www.cribfb.com/journal/index.php/amfbr/article/view/200