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Causality Evidence of Exchange Rate - Stock Price Relation in Nigeria: Symmetric and Asymmetric Approach

Acta Universitatis Danubius. Œconomica, 2023-01, Vol.19 (4) [Peer Reviewed Journal]

2023. This work is published under https://creativecommons.org/licenses/by-nc/4.0/ (the “License”). Notwithstanding the ProQuest Terms and Conditions, you may use this content in accordance with the terms of the License. ;ISSN: 2065-0175 ;EISSN: 2067-340X

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  • Title:
    Causality Evidence of Exchange Rate - Stock Price Relation in Nigeria: Symmetric and Asymmetric Approach
  • Author: Adedeji Gbadebo
  • Subjects: Asymmetric causality ; Asymmetry ; Causality ; Foreign exchange rates ; Fragments ; Granger causality ; Negative cumulative component ; Positive cumulative component ; Prices ; Securities markets ; Stock exchanges ; Stock prices ; Symmetric causality
  • Is Part Of: Acta Universitatis Danubius. Œconomica, 2023-01, Vol.19 (4)
  • Description: Foreign exchange and stocks are the two most traded financial assets in the world. The causality between their prices has been subject of research, particularly, on whether it is exchange rates that drive stock prices, as suggested by flow-oriented models from Dornbusch and Fisher (1980) or it is stock prices that drive the exchange rates, as suggested by the flow-oriented models from that Frankel (1983). I use data, from Nigeria, to explore Granger causality between them based on the symmetric approach, from Toda-Yamamoto (1995) and the asymmetric approach, from Hatemi-J (2012), for handling connectedness for ergodic variables with deterministic trends. The empirical test completed, as reveal by the unit root confirmation, identifies that the two considered series are trended and integrated. The results from the symmetric method recognise causality from exchange rate to the stock price, with no potential Granger-causal feedback. I transform the integrated series into negative and positive cumulative fragments, and complete the asymmetric test using the Wald statistic to verify the likelihood of lopsided causality. The results identify that allowing for asymmetry, and in particular, positive shocks in the naira exchange rate can cause a positive shock in share price, and not vice versa. Also, negative shocks in the exchange rate would not cause a negative shock in share price. This implies that any depreciation or devaluation of the naira would motivate investors to increase their participations in the stock exchange market. These finding has vital policy implications to different stakeholders, including government, regulators, currency- and stock markets traders and others in the Nigerian context.
  • Publisher: Galati: Universitatea Danubius Galati
  • Language: English;French
  • Identifier: ISSN: 2065-0175
    EISSN: 2067-340X
  • Source: ROAD: Directory of Open Access Scholarly Resources
    ProQuest Central
    DOAJ Directory of Open Access Journals
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