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Advances in Social Sciences Research Journal – Vol. 9, No. 4
Publication Date: April 25, 2022
DOI:10.14738/assrj.94.12106. Ajeigbe, O. M. (2022). Dynamics of Oil Price, Exchange Rate and the Trade Performance of Quoted Industrial Sectors at the All
Securities Market (Asem) in Nigeria. Advances in Social Sciences Research Journal, 9(4). 267-286.
Services for Science and Education – United Kingdom
Dynamics of Oil Price, Exchange Rate and the Trade Performance
of Quoted Industrial Sectors at the All Securities Market (Asem)
in Nigeria
AJEIGBE Omowumi Monisola
Department of Economics, Faculty of Social Sciences
Redeemers University, Ede
ABSTRACT
The study examined the dynamic interaction among oil price, exchange rate and the
trading performance of quoted industrial sectors at the Nigerian stock exchange
market from 1980 to 2020 used in a Panel Vector Error Correction Mechanism
(PVECM) framework. Data were sourced from BP Energy Review, Central Bank of
Nigeria Statistical Bulletin and Annual report of the Nigerian Stock Exchange
Market. Findings showed that long run relationships were established for oil price,
exchange rate and the stock market performance of the industrial sectors. The
result revealed a long run negative relationship among oil price, exchange rate and
the stock market performance of the industrial sector. In the absence of possibility
of complete shift of the burden of oil price rise on to the consumers, the profits and
dividends of companies are reduced which may result into decline in stock prices
on the long run. The study suggested that variations in oil price and exchange rate
are two strong macroeconomic factors which also stand as a risk factor to the
performance of the Stock Exchange Market both at the aggregate market level and
the disaggregated industrial sector level, therefore, government policies need to be
redirected towards controlling for both the negative and positive effect of the risk
factors as their impact on the Stock Exchange Market is revealing from this study.
Keywords: Oil price, Exchange rate, Quoted industrial sectors, Panel Vector Error
Correction Mechanism, Nigerian stock exchange market.
INTRODUCTION
The impact of crude oil price on the stock market has been of keen interest to many people in
recent time as it has appealed the attention of investors as well as researchers basically from
different approaches such as through empirical and theoretical angle, sectoral, country explicit,
regional and global analysis approach. (Kelikume and Muritala, 2019, Hamdi et al, 2019, Wong
and El. Massah, 2018; Xiao et al., 2018, Hu et al., 2018, Ji et al, 2018 Dutta, NIkkinen and
Rothovious, 2017; Huang et al, 2017; Kang, de Gracia and Ratti, 2017). The impact on quoted
industrial sectors can be traced to corporate liquidity and earning which has triggered both the
theoretical and empirical investigation into the interaction between crude oil prices and the
sectoral stock market value (Badeeb and Lean, 2018). The interaction between oil price and
sectoral stock value can be traced to Asset Pricing Theory, which revealed that the price of oil
posed a risk factor for equity markets (Mokni, 2020; Ferson and Harvey, 1995). It is also
confirmed that oil price can affect the stock market through various channels which include the
disaggregated industrial sectors (Salisu and Isah, 2017; Arouri et al, 2011; Huang et al, 1996).
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Advances in Social Sciences Research Journal (ASSRJ) Vol. 9, Issue 4, April-2022
Services for Science and Education – United Kingdom
In another scenario, given the growing trend towards globalization in the stock markets, the
vulnerability of stock returns to changes in the exchange rates is on the increase, because
investors may try to reduce their risk through global deviation (Fasanya & Akinwale, 2022; Bala
& Hassan, 2018; Akdogu & Birkan, 2016). This implies that; adequate knowledge about the
interaction between exchange rate and the sectoral stock value is sine qua non to boosting both
the foreign direct investment and the foreign portfolio investment which are major drivers of
aggregate investment and growth. Besides, the path of exchange rate can be predicted via the
linkage between stock markets in two countries, which determines the capability of the
multinational companies to accomplish their foreign transactions (Hammood, 2022;
Gokmenoglu, Eren & Hesami, 2021;Afshan et al, 2018; Zivkov et al, 2018).
It is rational to say that oil price and exchange rate are the two major macroeconomic variables
controlling the economy and its economic activities, but the direction of their impact on the
trade performance of quoted industrial sector in Nigeria is what is yet to be ascertained given
the dynamics of the world economic system. This study determined the dynamic interaction
among oil price, exchange rate and the trade performance of quoted industrial sector at the
Nigerian Stock exchange market. The study extends the understanding of the relationship
among oil prices, exchange rate and the stock markets in Nigeria by testing for linear short run
and long run linkages at disaggregated industrial sector levels. More so, most of the studies
linking oil price, exchange rate and stock market in Nigeria such as Adebiyi., et al, (2010), Akinlo
(2014), all focus on empirical evidence at the aggregate market level. This study takes a
different perspective and explores the dynamics with emphasis on the interaction among oil
price, exchange rate and the trade performance of quoted industrial sector at the All Securities
Market (ASEM) in Nigeria. The remainder of the paper is organised as follow. In section 2, a
review of literature is provided on the interaction among oil price, exchange rate and sectoral
stock returns. In section 3, the theoretical framework underpinning the study and methodology
was described. Section 4 presents the result and discussion and section 5 concludes the study
with recommendations.
RELATIONSHIP AMONG OIL PRICE, EXCHANGE RATE AND SECTORAL STOCK VALUE
Several authors have attempted to examine the interaction among oil price, exchange rate and
stock value of the industrial sectors at various stock exchange markets.
A study by Fasanya and Akinwale (2022) examined the effect of exchange rate shocks on ten
(10) sectoral stock returns in Nigeria from January 2007 to December 2018. The autoregressive
distributed lag and nonlinear autoregressive distributed lag were employed to examine
symmetric and asymmetric relationship between exchange rate and sectoral stock returns. The
result from the study shows that only financial service sector moves in an asymmetric fashion
in the short and long period without taking account of structural breaks and with structural
breaks, none of the sectoral stock returns were asymmetric. The result showed that exchange
rate movement affects the sectors differently. Therefore, this study concludes that a single
model cannot fit all the sectoral stock returns because all sectors react otherwise to exchange
rate movements and the information about a particular sector cannot be used to forecast other
sectors. These results offer important insights for investors, regulators and policymakers.
A similar study by Ahmed & Mohammad (2022) investigated the effect of oil prices on firm’s
returns using a panel Vector Autoregressive (PVAR) model. Granger causality tests are used to
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Ajeigbe, O. M. (2022). Dynamics of Oil Price, Exchange Rate and the Trade Performance of Quoted Industrial Sectors at the All Securities Market
(Asem) in Nigeria. Advances in Social Sciences Research Journal, 9(4). 267-286.
URL: http://dx.doi.org/10.14738/assrj.94.12106
see if oil prices are effective in predicting returns. The dynamic impact of supply shocks is
studied using Impulse Response Functions (IRFs). From January 2011 to May 2021, the study
made use of daily data from all listed power sector enterprises on the Pakistan stock exchange.
To investigate the differences in reactions between the Pre-COVID and COVID eras, the sample
was separated into two groups. Oil shocks are inversely associated with daily firm stock
returns. The study concluded that lack of impact of stock prices on oil prices deteriorates during
the COVID pandemic. The study could not uncover any evidence of a significant relationship. In
developing countries that rely on oil imports, the study sheds light on the utility of oil price
shocks in daily stock return predictions.
From another perspective, Guglielmo (2021) analysed the effects of oil prices and exchange
rates on sectoral stock returns in the BRICS-T countries over the period from 2 January 2001
to 22 March 2021. After estimating a benchmark linear model, the possible presence of
structural breaks is investigated using the Bai and Perron (2003) tests, and a state-space model
with time-varying parameters is then estimated. The main findings can be summarised as
follows. Both the sub-samples and the time-varying estimates indicate a greater role for
exchange rate returns. Oil prices have a positive and significant impact on the energy sector in
all countries except India; a negative and significant one on the financial sector of Brazil, Russia,
India, and South Africa; no effect on the transportation sector of Brazil, China, and South Africa,
a negative one on those of India and Turkey, and a positive one in the case of Russia. The
vulnerability of energy-dependent sectors to global fluctuations implies that appropriate
energy policies should be adopted to reduce risk.
Another study by Abeng (2016) focused on the impact of oil price fluctuation on the sector level
activities of the stock market in Nigeria. Five industry sectors were examined based on
availability of data while included macroeconomic factors were selected guided by economic
theory and existing literature. The results from the study suggested that changes in oil prices
significantly affect stock returns of all the sectors, except food beverages and tobacco. This is
similar to the findings from McSweeney and Worthington (2007) and Agusman and Deriantino
(2008) for the Australian and Indonesian stock markets, respectively, the parameter estimates
of market returns for the banking, insurance, food beverages and tobacco, oil and gas and
industrial sectors significantly exceeded unity, suggesting a high risk exposure of these sectors
vis-à-vis market returns. The food beverages and tobacco and oil and gas sectors exhibit
significantly negative sensitivity to exchange rate risk, indicating the devastating effect of the
depreciation of the domestic currency on the returns of these sectors. The consequences are
huge. First, the negative response of all sectors to exchange rate movement calls for prudent
management of reserves plus informed and timely intervention in the market by the monetary
authority to keep the rate stable. Secondly, the insensitivity of the food beverages and tobacco
to oil price movement is an indication of the inefficiency instituted by the subsidy on petroleum
products that insulate domestic consumption from market fundamentals. Subsidies distort the
efficient allocation of resources by the market and in the case of Nigeria abet and aid corruption.
Another study from Nigeria by Akomolafe and Danladi (2014) analysed the association
between the industrial stock returns and changes in oil price. Cointegration and Vector Error
Correction Mechanism was employed and the variables measured comprised stock market
returns for the selected industries which are banking, oil and gas and construction industries.
Findings point toward industries belonging to sectors seemingly are not directly affected by oil
prices and are also sensitive to oil price changes.