The Impart of Inflation and Exchange Rates on Stock Prices in Nigeria
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This paper uses a trivariate VAR model to examine the impact of inflation and exchange rate on stock prices in Nigeria. Monthly data in logarithmic form are used covering a period of 13 years from January 2000 to December 2012. There are altogether 156 observations for each data series. The variables are consumer price index, average exchange rate of ₦/$and closing prices of the Nigerian stock exchange All-share index. The hypothesis testing is based on ADF stationarity test, Johansen system cointegration test, Granger causality tests, Impact response function and Forecast error variance decomposition. The results indicate that although, the three variables are integrated of the same integration, there is no cointegration or long run relationships between them. When unrestricted VAR is estimated, the coefficients are found to be stable as no VAR root is found to lie outside the unit circle. The results of the Granger causality test suggest evidence of a unidirectional causality from inflation to stock prices and from inflation to exchange rate, and a feedback causality between exchange rate and stock prices. Although, the causality from inflation to stock prices and from exchange rate to stock prices is significant only at 10% level, there is evidence that both innovations in inflation and exchange rate have contemporaneous effects on stock prices. However, while the effect of inflation is negative, the effect of exchange rate is positive. Finally, the results indicate that own shocks explain most of the variations in stock prices.
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