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.

Key Words: Crude Oil Price, Exchange Rate, Nigerian Stock Market, Vector Error Correction Model