Exchange Rate and Stock Market Interactions: Evidence from Nigeria
This paper examines the effect of exchange rate risk on Interest rates within the then we found that there Is a positive relation between the exchange rate risk. in spot exchange rates rather than interest rate differentials. . The similarity of the statistical relationships between equity options and underlying The usual no-arbitrage relation applies, so risk-adjusted currency excess returns have a. It has negative relation in the long run but positive in short run. . applied according to the long-term interest rates, short-term exchange rate and investment. On.
Review of Related Literature There are basically two theories that explain the interactions between exchange rate and stock market prices. These are flow oriented model and stock oriented model. In flow oriented model, it is the changes in exchange rate that lead to stock prices changes. On the other hand, exchange rate affects the stock prices of domestic firms, if fluctuations in exchange rate affect their input-output prices and demand for their products [ 6 ].
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More so, the causality is expected to run from exchange rates to stock prices. This is because movement in exchange rate would either increase or decrease the firm stock prices depending on whether the firm is exports or imports oriented. Stock oriented model also known as portfolio adjustment approach is of the opinion that, it is the stock prices that cause exchange rate changes.
A change in stock price may lead to inflows and outflows of foreign capital. An increase in the stock prices is expected to attract capital inflows, thus leading to exchange rate appreciation. Empirically, Abdallah and Murinda [ 8 ], Aydemir and Demirham [ 9 ] reveal that it is the exchange rates that granger cause stock prices. Additionally, bidirectional evidence has been revealed from the works of Rjoub [ 13 ], Umoru and Asekome [ 14 ] and Khan and Ali [ 2 ], while Rahman and Uddin [ 15 ], Zia and Rahman [ 16 ] and Zubair [ 5 ] shows no evidence of causality.Interest Rates and Exchange Rates
Empirical studies on the relations between exchange rate and stock market were conducted both within and outside the country. For instance, Abdallah and Murinde [ 8 ] examined the stock priceexchange rate interaction of four countries; India, Korea, Pakistan and Philippine.
They applied Granger causality and co-integration approaches. Their study indicated a unidirectional causality running from exchange rate to stock market in all the countries under study accept Philippine. Aydamir and Demirham [ 9 ] examined the impact of stock price on exchange rate in Turkey using daily data from 23rd of February to 11th of January, Their study found that there exists bidirectional causality between stock market indices and exchange rate.
Employing Granger causality, Kutty [ 11 ] analyzed the connection between exchange rate and stock market prices in Mexico.
He used weekly data from the 1st of January, to last week of December, The result shows the evidence of causality between stock market and exchange rate and that no evidence of long run relationship. Their result shows that there is unidirectional causality running from stock price to exchange rate. They recommended that government should take into consideration the previous values of stock indices when making exchange rate policy. They employed monthly data, Johnson co-integration and Granger causality test in the analysis.
Their results indicated that, there is no long run relationship and that causality runs from exchange rate to stock market in Canada, Switzerland and United Kingdom. Rjoub [ 13 ] investigated the relationship between stock market and exchange rate in Turkey using monthly data from He applied co-integration and Granger causality test techniques and the result shows evidence of cointegration between the series.
More so, Granger causality test reveals the existence of bidirectional relationship [ 14 - 16 ]. Hussein and Mgammal [ 17 ] examined the relationship among the inflation, interest rate, exchange rate and stock market prices in Kingdom of Saudi Arabia and United Arab Emirate UAE using monthly data from The study reveals that exchange rate is negatively related to stock market prices while no evidence of relationship exist between interest and inflation.
Equally, in Nigeria, Yaya and Shittu [ 18 ] examined the impact of inflation and exchange rate on conditional stock market volatility in Nigeria. Monthly series data spanning from to were used. Their analysis proved that inflation and exchange rates exert significant influence on conditional stock market volatility.
They suggested that, the findings are of great significant to policy makers, stock brokers and investors operating within the Nigerian economy. Asaolu and Ogunmuyiwa [ 3 ] tested whether macroeconomic variables exert positive impact or otherwise on the stock market movement in Nigeria.
Granger causality test, co-integration and Error Correction Model ECM were applied in examining the series spanning from to The variables of their choice are average share price, external debt, interest rate, fiscal deficit, exchange rate, foreign capital inflow, investment, industrial output and inflation rate. The study indicated the existence of co-integration among the series under control. The findings also show that there is unidirectional causality running from exchange rate to average share price.
Osamwonyi and Osagie [ 19 ] applied VECM in analyzing the connection among interest rate, inflation rate, exchange rate, fiscal deficit, GDP, money supply and stock market index in Nigeria. Annual time series data were employed from to They found that macroeconomic variables affect stock market index in Nigeria.
For better robust growth of the market, the study suggested the application of suitable policy measures in the economy. Zubair [ 5 ] assessed the stock market-exchange rate nexus in Nigeria using monthly data for the period to The study used stock market index, exchange rate and money supply as variables in the model. The study further used Johnsen co-integration and Granger causality as techniques of data analysis.
The study reveals that there is no long run relationship among the variables. The Granger causality test shows that no evidence of causality between exchange rate and stock market and that there is unidirectional causality from money supply to stock market index.
Factors determine exchange rate volatility of somalia | Isse A Mohamud - meer-bezoekers.info
Esther and Emeno [ 20 ] examined the nexus among inflation rates, financial openness, exchange rates and stock market returns volatility in Nigeria from to They found that inflation has negative and statistically significant impact on stock market returns and exchange rate has positive and statistically significant influence on stock returns.
The study recommends the need for the policymakers to employ strong and suitable policy measures which include credit control, cutting the cost of governance, increase production and anti-inflationary budgetary policy. Abstract The purpose of this paper was to investigate what factors determines the exchange rate of Somalia. Quantitative research methodology has been employed to develop regression model using time series data of 12 years.
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The regression model has been developed based on Quantity theory of money, purchasing power parity and uncovered interest rate parity theory. Based on my study using regression model for time series data of 12 years, the four factors are mainly attributable for the exchange rate volatility of Somalia; these factors include balance of payment, inflation rate, money supply mostly come from remittance and NGOs and Bank profits.
Introduction The exchange rate is a very important macro variable that has influence on the whole economy and has therefore been the topic of many discussions amongst policymakers, academics and other economic agents.
The issue of whether to have a fixed, pegged or floating exchange rate regime was highly debated during the s. The discussion is still very important since countries today again stand before the choice of which exchange rate regime to adopt. Somalia was officially adopted fixed exchange rate inwhere the Somali shilling is pegged with Italian lira, because Somalia was colonized by Italy; at that time 1 Lira was pegged to 8 Somali shilling. The central bank of Somalia had the ability to intervene the market and also settle the policies of financial markets.
Remittances have constituted the major source of foreign exchange earnings for the last ten years. The flow of remittances to and from abroad therefore significantly affects the exchange rate in Somalia. The value of the Somali shilling before the collapse of Somali central government in seemed stronger because of the administration that being interfered the exchange market.
Fixed exchange rate was adapted during that period, and the government has the power to balance the marked using physical policy Leeson, Foreign investors and multinational firms use volatility models in their estimation of risks associated with exchange rate as well as the inputs when they evaluate prices. The policymakers on the other hand use the information about how the factors impact the exchange rate volatility so that the most appropriate policy can be conducted.
Literature Review The exchange rate is simply the price of one country's currency expressed in another country's currency. In other words, the rate at which one currency can be exchanged for another. For example, the exchange rate between the U. Among these main factors are; the level of output, inflation, the openness of an economy, interest rates, domestic and foreign money supply, the exchange rate regime and central bank independence.
Bah and Amusi,Azaikpono, and Todani and Munyama, examined the effect of real exchange rate variability exerts a significant and negative impact on the trade both in the long and short-run.
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The similar study by Azaikpono, extends the work of Bah and Amusa, over the period by employing autoregressive conditional heterokedasticity method proposed by Nelson as a measure of variability of exchange rate; the result of the latter boil down to those reached by the former.
Here, however, we consider the interest rate alongside the exchange rate. The reason for this is that because capital can move freely into and out of the each country. Ling, Zekai and Wef, explained the linkage between exchange rate and interest rate; he argued that interest rate has negative relationship with exchange rate.
For example if countries want more US bonds. The foreign demand for USD increases and so the nominal exchange rate falls appreciates making USD more expensive to buy on forex. This appreciation occurs to offset the increased demand in USD. The relationship between inflation targeting regime and exchange rate regime has led some analysts to conclude that one of the costs of inflation targeting adoption is the increase in exchange rate volatility. Yet, some studies show that the adoption of a free-floating exchange rate does not necessarily implies more effective of nominal and real exchange rate floating.
Baba, Engle, Kraft, and Kroner, argued that inflation targeting would lead to higher exchange rate volatility. Mohd, find that the lack of credibility of monetary authority may lead to exchange rate volatility problem. Evidence for such a correlation is also abundant for major equity and bond markets Osler, Many observers would argue that the high trading volume reflects high speculative activity which, in turn, induces the high price volatility.
In fact, over 90 percent of foreign exchange market participants in Japan, Hong Kong, and Singapore believe that speculation increases volatility Cheung and Chinn, Others claimed that rational speculation must reduce exchange rate volatility.
Regression model was developed using theoretical frame work from the literate in order to predict exchange rate knowing the independent variables. Time series data of 12 years from up to was used; references and details of the data were explained in data source section.
Money demand model can be applied to the Keynesian money supply equation taking purchasing power parity ppp and uncovered interest rate parity UIP that can be expressed as: Where m is nominal money at time t, p is price index at time t, is elastic demand adjusted to the expected inflation.
It assumed that interest disparity between the countries is the result of the currency movement so it specified as: Where stands for international interest rate and is difference between the exchange rates.