Effect of Exchange Rate Returns on Equity Prices: Evidence from South Africa and Nigeria

Abstract

This paper examines the exchange rate returns of the Rand (relative to the US dollar) and the Naira (relative to the US dollar) for the presence of volatility. It also examines the effect of the exchange rate returns on the performance of their respective stock market. While it was found that the returns of the South African Rand was volatile, the Nigerian naira was not. Estimating the effect of exchange rate returns and crude oil price on the stock market indices of both countries showed that exchange rate return have a positive effect on the performance of the Nigerian stock exchange thus, confirming the stock flow hypothesis for Nigeria and refuting same for South Africa. Although the VAR granger causality identifies short run fluctuation of the naira as a significant factor affecting the performance of the Nigerian stock exchange in the short run, the Johannesburg stock exchange was found to be mostly affected by short run changes in the Rand and the UK FTSE 100. The paper concludes that policies aimed at stabilizing exchange rate and encouraing more non-oil stocks to be quoted in the Nigerian stock exchange will important. For the Johanesburg stock exchange, raising the listing requirement for firms quoted in the UK FTSE 100 and also seeking listing or already listed in the JSE will be a plausible idea. For both countries, however, curtailing swings in their exchange rate returns would help attract new investments and sustain existing ones hence, helping to spur growth.

Oil Price Volatility and Equity Valuation of Listed Energy Companies in Nigeria: A Panel ARDL Model

“…Using a VAR model to explain the link between prices of crude oil and investments in renewable energy in African states, Tambari and Failler, (2020) found that oil price shocks had a positive and statistically significant impact on African countries' investments in renewable energy. Daggash and Abraham (2017) discovered an identical phenomenon using the VAR Granger Causality Method.…”

Effect of Exchange Rate on Stock Price Movement in Nigeria

“…In addition, the study reveals a long run equilibrating connection existing amongst the variables. Daggash and Abraham (2017) analyze the exchange rate returns effect on equity prices in Nigeria and South Africa and checked for the presence of volatility in the Naira and the Rand using the Vector Autoregressive (VAR) model. The study finds the existence of volatility in the returns of the Rand, while such does not exist in the Naira return.…”