DYNAMICS OF EXCHANGE RATE AND STOCK PRICE INDEX IN EMERGING MARKETS: AN EMPIRICAL EVIDENCE FROM NIGERIA AND SOUTH AFRICA
Abstract
This paper investigates the dynamics of Exchange Rate and Stock Price Index in Nigeria and South Africa. To conduct this study, daily exchange rates of US dollar(USD), Euro (EUR), Japanese Yen (JPY), and Great British Pound Sterling (GBP) against the Nigerian Naira and South African Rand, and daily values of Nigerian Stock Exchange-All Share Index (NSE-ASI)and Johannesburg Stock Exchange-All Share Index(JSE-ASI) were considered for the period of January2010 to September 2017. Johansen co-integration tests and Granger causality tests were employed to analyze the correlation between the two financial variables. The findings show no evidence of a co-integrating relationship between domestic stock prices and exchange rates for all the four currencies. Thus, test fora short-run in-sample causal relationship between domestic stock prices and exchange rates was conducted. The empirical results indicate that no causality exists between domestic stock prices and exchange rates of US dollar and Japanese Yen against Naira; while causality ensues from domestic stock prices to exchange rate of Euro and British Pound Sterling against Naira. Furthermore, unidirectional causality exists between domestic stock prices and exchange rates for Japanese Yen and British Pound Sterling against Rand; yet, there is an evidence of bidirectional causality between domestic stock prices and exchange rates for US dollar and Euro against Rand. This suggests that the diffusion progression between stock market and foreign exchange market is depicted by the “Stock” oriented channel in Nigeria, while in South Africa, “Flow and Stock” oriented channels subsisted.
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