TABLE OF CONTENTS
Chapter One: Introduction
1.1 Background of the Study
1.2 Statement of the Problem
1.3 Research Questions
1.4 Objectives of the Study
1.5 Research Hypotheses
1.6 Significance of the Study
1.7 Scope of the Study
Chapter Two: Overview of the Foreign exchange and Stock Market Development in Nigeria
2.1 Foreign Exchange Market in Nigeria
2.1.1 The Exchange Rate: Pre SAP period (1970-1986)
2.1.2 The Exchange Rate: Under SAP period (1986-1995)
2.1.3 The Exchange Rate: Post SAP period (from 1995)
2.2 Stock Market Development in Nigeria
2.2.1 Market Infrastructure
2.2.2 Internationalization of the Nigerian Stock Market
2.2.3 Investors Marker awareness
Chapter Three: Literature Review
3.1 Conceptual Literature
3.1.1 Stock Market/Price
3.1.2 Exchange Rate
3.2 Theoretical Literature
3.2.1 Flow Oriented Model
3.2.2 Stock Oriented Model
3.2.2.1 Monetary Model
3.2.2.2 Portfolio balance Model
3.3 Empirical Literatures
3.3.1 International Studies
3.3.2 Domestic Studies
3.4 Gap in Previous Studies in Nigeria and Value added
Chapter Four: Research Methodology
4.1 Theoretical Framework
4.2 Model Specification
4.3 Justification of the Model
4.4 Estimation Procedure
4.4.1 Unit Roots Test.s
4.4.2 Cointegration Test
4.4.2.1 Engle and Granger (1987) two-step methodology
4.4.2.2 Johansen Cointegration test
4.4.3 ARCH Effects Test
4.5 Data Sources and Software for Analysis
Chapter Five: Presentation and Analysis of Results
5.1 Descriptive Statistics
5.2 Unit Roots Test Result
5.3. Co-integration Test Result
5.3.1. Engle and Granger (1987) two-step Cointegration Tests Results
5.3.2 Johansen Cointegration Test Result
5.4 ARCH Effects Result
5.5 VEC-GARCH Model Result
Chapter Six: Summary of Findings and Policy Recommendations
6.1 Summary of Findings
6.2 Policy Recommendations
References
Appendix
ABSTRACT
The need to capture stock market and foreign exchange market nexus in Nigeria is underscored by the rapidly expanding financial markets integration due to trade and financial liberalization policies which seem to have enhanced the inflow of capital as well as accelerated investment/business interactions. Theoretically, the relationship between stock prices and exchange rate can be either positive or negative and can also run either way. This study therefore captures returns/mean and volatility spillovers between the stock and foreign exchange markets in Nigeria. The study empirically analyzes stock prices and exchange rate interactions with VAR and multivariate generalized autoregressive conditional heteroscedasticity (GARCH) models using monthly data from January 2000 to October 2014. The results of the E-G and Johansen cointegration test show that there is stable long-term equilibrium relationship between stock prices and exchange rate. The empirical evidence of the VAR-GARCH model shows a significant mean spillover running from stock market to exchange market but not a mean spillover from exchange market to stock market. Furthermore, the variance equation results show that there exist bi-directional volatility transmission effect between the two markets, indicating the past innovations in stock market have the great effect on future volatility in foreign exchange market, and vice versa. The results have important implications for international portfolio managers in the portfolio diversification decisions and risk hedging strategies.
CHAPTER ONE
Introduction
1.1 Background of the Study:
The relationship between stock prices and exchange rate has attracted much attention amongst financial expert, researchers and policy makers in Nigeria since the inception of the Structural Adjustment Programme (SAP) in 1986. The period witnessed significant changes in the Nigerian financial system, such as the emergence of new equity markets in terms of liberalization policy. This era saw the abolishment of trade barriers on capital flows and adoption of flexible exchange rate, which subsequently result to verities of investment opportunities. Hence, the broadened investment opportunities in turn promote frequent inflow and outflow of investment into the market. As a result, this has led to the increase in demand and supply for local currency and thus, the volatility in exchange rates that sometime affect the investment decisions and portfolio diversification of many investors.
However, the understanding of the influence of exchange rates on stock prices and their interactions in Nigeria cannot be over-emphasis. This is because of the significant role they play in stabilizing the macroeconomic environment, which in turn spur economic growth and development. Though, there has been thoughtful disagreement on the relationship between stock prices and exchange rate. It has been argued that the interplay of demand and supply of domestic currency partly determined stock price movement (Bahmani-Oskooee & Sohrabian, 1992). But this idea has been refuted by some scholars who believed that rise or fall in stock prices play a significant role in demand and supply of domestic currencies (Stavarek, 2005; Pan, Fok, & Lin, 2007). Thus, an appreciation of stock prices translates to the effectiveness of the market in terms of its performance. Therefore, an efficient market always attracts reasonable number of domestic and foreign investors. However, the inflows of foreign investors into the market due to its performance, causes increase in demand and supply of domestic currency. In like manner, the exchange rates appreciation due to increase in demand and supply of domestic.....
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