Oil Price Volatility, Exchange Rate Movements and Stock Market Reaction: The Nigerian Experience (1985-2017)
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.
Basher, S. A.& Sadorsky, P. (2006). Oil price risk and emerging stock markets, Global Finance Journal, No.17, pp.224-251.
Basher, S. A., Alfred, A. & Sadorsky, P. (2010). Oil prices, exchange rates and emerging stock markets, Discussion Papers No. 1014, University of Otago, New Zealand.
Bastianin, A. & Manera, M. (2014). How does stock market volatility react to oil shocks?,IMF Working Papers: Conference Paper 6-8, December.
Berk, I. & Aydogan, B. (2012). Crude oil price shocks and stock returns: Evidence from Turkish stock market under global liquidity conditions, ENI Working Paper No.12/15, September, Institute of Energy Economics, The University of Cologne
Bjornland, H. C. (2009). Oil price shocks and stock market booms in an oil exporting country, Scottish Journal of Political Economy, Vol.56, Issue 2, pp. 232-254.
Bodie, Z., Kane, A. & Marcus, A. (2008). Investments, 8th ed. New York, McGraw-Hill/Irwin.
Bollerslev (1986). Generalized autoregressive conditional heteroskedasticity, Journal of Econometrics, Vol.31, No.3, pp. 307-327
Bollerslev, T., Chou, R. Y & Kroner, K. F. (1992). ARCH modeling in finance: A review of the theory and empirical evidence, Journal of Econometrics, Vol. 52, No. 5, pp. 5-59.
Brooks, C. (2008). Introductory econometrics for finance, 2nd ed., Cambridge, Cambridge University Press.
Caporale, G. M., Ali, F. M. & Spagnolo, N. (2015). Oil price uncertainty and sectoral stock returns in China: A time-varying approach, China Economic Review, Vol. 34, No. pp. 311-321.
Chen, N.F., Roll, R. & Ross, S. (1986). Economic forces and the stock market, Journal of Business,Vol.59, No.3, pp. 383-403
Dhaoui, A.& Khraief, N. (2014). Empirical linkage between oil price and stock market returns and volatility: Evidence from international developed markets, Discussion Paper, No.2014-12, March 20, Kiel Institute for the World Economy.
Engle, R. (1982). Autoregressive conditional heteroskedasticity with estimate of the variance of United Kingdom inflation, Econometrica, Vol, 50, No.4, pp. 987-1007.
Francis, J. (1980). Investments: Analysis and management, New York, Prentice Hall Inc.
Gordon, M. J. (1959). Dividends, earnings and stock prices, The Review of Economics and Statistics, Vol.41, No.2, Part 1, (May), pp. 99-105.
Goudarzi, H. (2013). Volatility mean reversion and stock market efficiency, Asian Economic and Financial Review, Vol.3, No. 12, pp. 1681-1692,
Granger, C. W. J. (1969). Investigating causal relations by econometric models and cross-spectral methods, Econometrica, 37, pp.424-438
Hamma, W. Jarboui, A. & Ghorbel, A. (2014). Effect of oil price volatility on Tunisian stock market at sector-level and effectiveness of hedging strategy, Procedia Economics and Finance, Vol. 13, pp.109-127.
Hirt, G. & Block, S. B. (1983).Fundamentals of investment management and strategy,Illinois, Richard D. Irwin Inc.
Huang, R. D., Masulis, R. W. & Stoll, H. R. (1996). Energy shocks and financial markets,Journal of Futures Markets, Vol.16, No.1, pp.1-27.
Iheanacho, E. (2017). Impact of oil price shocks on stock market returns: Toda Yamamoto causality approach, Journal of Finance, Banking and Investment, Department of Banking and Finance, Abia State University, Vol. 4, No. 1, March, pp. 100-111.
Kang, W., Ratti, R. A. & Yoon, K. H. (2015). The impact of oil price shocks on the stock market return and volatility relationship, Journal of International Financial Markets, Institutions and Money, Vol. 34, pp. 41-54.
Lake, A. E. & Katrakilidis, C. (2009). The effects of the increasing oil price returns and its volatility on four emerged stock markets, European Research Studies,Vol.XII, Issue (1), pp. 149-161.
Lintner, J. (1965). Security prices, risk and the maximal gains from diversification, Journal of Finance, Dec. pp. 587-615.
Masih, R. Peters, S. & De Mello, L. (2011). Oil price volatility and stock price fluctuations in an emerging market: Evidence from South Korea, Energy Economics, Vol. 33, No.5, pp. 975-986
Mossin, J. (1966). Equilibrium in a capital asset market, Econometrica, Oct, pp. 74-83.
Muhtaseb, B. M. A. & Al-Assaf, G. (2017).Oil price fluctuations and their impact on stock market returns in Jordan: Evidence from asymmetric co-integration analysis, International Journal of Financial Research, Vol. 8, No.1, pp.172-180.
Okafor, F. O. (1983). Investment decisions: Evaluation of projects and securities, London,Cassell Ltd.
Ogbulu, O. M. (2012).All-Asset market portfolio and the risk-return behaviour of assets:Evidence from the Nigerian capital market, Saarbrucken, Germany, LAP Lambert Academic Publishing.
Ogbulu, O. M. (2009). Capital market development and economic growth in Nigeria:Application of co-integration and causality tests, Journal of Finance, Banking and Investment, Department of Banking and Finance, Abia State University, Vol. 3, No. 1, April, pp.1-19.
Ogbulu, O. M. (2016).Weak-form market efficiency, estimation interval and the Nigerian Stock Exchange: Empirical evidence, International Journal of Economics & Business, Vol. 5, No.1, pp. 84-116, Summer, International Academy of Business, ISSN: 1949-5166.
Ogbulu, O. M. & Torbira, L. L. (2012). Budgetary operations and economic growth: The Nigerian perspective, British Journal of Arts and Social Sciences, ISSN: 2046-9578, Vol.4, No.2, pp. 180-194.
Ogbulu, O. M. & Torbira, L. L. (2017). Transmission effects of the interaction between parallel and official foreign exchange markets in Nigeria, International Journal of Economics and Financial Research, Vol. 3, No. 6, pp. 76-90.
Ono, S. (2011). Oil price shocks and stock markets in BRICs, The European Journal of Comparative Economics, Vol.8, No.1, pp. 29-45.
Roll, R. (1977). A critique of the asset pricing theory’s test: Part 1 on past and potential testability of the theory, Journal of Financial Economics, No.4, March, pp.349-357.
Ross, S.A. (1976). The arbitrage theory of capital asset pricing, Journal of Economic Theory,Vol.13, pp. 341-360.
Yusuf, M. (2015). An analysis of the impact of oil price shocks on the growth of the Nigerian economy: 1970-2011, African Journal of Business Management, Vol. 9, No. 3, pp. 103-115
Zubair, A. Okorie, G. & Sanusi, A. R. (2013). Exchange rate pass-through to domestic prices in Nigeria: An empirical investigation, Economic and Financial Review, Central Bank of Nigeria, Vol.51, No.1, pp. 1-28
Copyright (c) 2018 Onyemachi Maxwell Ogbulu
This work is licensed under a Creative Commons Attribution 4.0 International License.