FOREIGN EXCHANGE RATE DYNAMICS AND THE NIGERIAN CAPITAL MARKET PERFORMANCE

Abstract

A stable foreign exchange and a well-regulated fiscal policy are crucial to a healthy and viable capital market performance of any nation. This study seeks to investigate the effects of foreign exchange rates dynamics on the Nigerian capital market performance. Secondary data sourced from the Nigerian stock exchange and the Central Bank of Nigeria Annual reports spanning from 1986 to 2015. The data obtained were subjected to both normality and co-integration tests.  The study employed Vector Error Correction Model to investigate the impact of foreign exchange on the Nigerian capital market performance using market capitalization as the dependent variable and the official foreign exchange rate as the independent variable. Other control variables such as interest rate, inflation rate and the gross domestic product were introduced to have holistic assessment of the market performance. The result reveals that foreign exchange, interest rate, inflation rate and GDP have negative significant impact on the Nigerian capital market at 5% and 1% respectively. Thus, the study concluded that foreign exchange dynamics have significant negative effects on the Nigerian capital market performance. Based on the findings, the study recommends that the Nigerian capital market should be made viable and attractive to all investors particularly the local investors so as to instill confidence in the market by channeling long-term fund to improve viable sectors of the economy such as agriculture. Also, the CBN should put in place appropriate monetary policies that will stabilize the Naira so as to encourage foreign investors’ patronage that will enhance the Nigerian market capitalization.