Estimating the effects of Exchange and Interest Rates on Stock Market in Nigeria

Abstract

The study examined the effects of exchange rate and interest rate on the Nigerian Stock Market using the All-share index as a proxy for the market. The monthly closing returns of All-share index, exchange rates and interest rates were utilized for a period of thirty years beginning from January, 2009 to December, 2011. Ordinary least square models were used to establish this relationship. The need to empirically determine the predictive power of exchange rate and interest rate on stock market returns formed the central problem and objective of the study. Result revealed a significant relationship with the exchange rate but a negative one. Implication of this is that an increase in exchange rate reduces stock market returns thereby dampening the market activity. The interest rate also showed a negative relationship but insignificant at the chosen 5% level of significance. This study recommended that policy makers should put in place measures that will ensure a stable macroeconomic environment since an unstable macroeconomic environment can deter investors and make them lose confidence in the system. A stable exchange and interest rates system is a prerequisite for attracting investments especially foreign direct investment.

Keywords: Exchange rate, interest rate, All-share index, multiple regression models

International Journal of Development and Management Review (INJODEMAR) Vol. 7 June, 2012