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Oil Price and Exchange Rate Volatility in Nigeria

Author

Listed:
  • Ogundipe, Adeyemi
  • Ogundipe, Oluwatomisin
Abstract
Nigeria being a mono-product economy, where the main export commodity is crude oil, changes in oil prices has implications for the Nigerian economy and, in particular, exchange rate movements. The latter is mostly important due to the double dilemma of being an oil exporting and oil-importing country, a situation that emerged in the last decade. The study examined the effects of oil price, external reserves and interest rate on exchange rate volatility in Nigeria using annual data covering the period 1970 to 2011. The theoretical framework of this study is based on Generalized Autoregressive Conditional Heteroskedasity modeled by Tim Bolerslev (1986) and Exponential General Autoregressive Conditional heteroskedastic modeled by Daniel Nelson (1991). These models were used to estimate the relationship between oil price changes and exchange rate. Relevant descriptive and econometric analyses were employed. The econometric tests adopted include the unit root tests, Johansen co-integration technique and the Vector Error Correction Model (VECM); the time series property examined shows that all the variables were stationary at first difference. The long run relationship among the variables was determined using the Johansen Co-integration technique while the vector correction mechanism was used to examine the speed of adjustment of the variables from the short run dynamics to the long run. It was observed that a proportionate change in oil price leads to a more than proportionate change in exchange rate volatility in Nigeria; which implies that exchange rate is susceptible to changes in oil price. The study therefore recommend that the Nigeria government should diversify from the Oil sector to other sectors of the economy so that Crude oil will no longer be the mainstay of the economy and frequent changes in crude oil price will not influence exchange rate volatility significantly in Nigeria.

Suggested Citation

  • Ogundipe, Adeyemi & Ogundipe, Oluwatomisin, 2013. "Oil Price and Exchange Rate Volatility in Nigeria," MPRA Paper 51668, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:51668
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    References listed on IDEAS

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    4. Adebayo Augustine Kutu & Harold Ngalawa, 2017. "Modelling Exchange Rate Volatility and Global Shocks in South Africa," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 13(3), pages 178-193, JUNE.
    5. Moses Tule & Afees A. Salisu & Charles Chimeke, 2018. "You are what you eat: The role of oil price in Nigeria inflation forecast," Working Papers 040, Centre for Econometric and Allied Research, University of Ibadan.
    6. Charles O. Manasseh & Janathan E. Ogbuabor & Felicia C. Abada & Okoro E.U. Okoro & Aja Ebeke Egele & Josaphat U. Onwumere, 2019. "Analysis of Oil Price Oscillations, Exchange Rate Dynamics and Economic Performance," International Journal of Energy Economics and Policy, Econjournals, vol. 9(1), pages 95-106.
    7. Moses Tule & Afees Salisu & Charles Chiemeke, 2020. "Improving Nigeria’s Inflation Forecast with Oil Price: The Role of Estimators," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 18(1), pages 191-229, March.
    8. Emmanuel Uche & Lionel Effiom, 2021. "Oil price, exchange rate and stock price in Nigeria: Fresh insights based on quantile ARDL model," ECONOMICS AND POLICY OF ENERGY AND THE ENVIRONMENT, FrancoAngeli Editore, vol. 2021(1), pages 59-79.
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    More about this item

    Keywords

    Oil Price; Exchange rate; Volatility; Johansen Co-integration;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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