The Effects of Trade Openness and Exchange Rate on Stock Market Capitalization Growth in Nigeria
Abstract
This study examines the linkage among trade openness, exchange rate on stock market capitalization growth in Nigeria, using annual data from 1981 to 2017. In conducting the analysis, this study utilized Vector Error Correction model and Granger Causality tests. Trade openness, foreign direct investment, exchange rate, balance of payment and stock market capitalization growth were captured in the model. The results show that trade openness, and balance of payment have positive and statistically significant impact on stock market capitalization growth in Nigeria, while foreign direct investment and exchange rate have negative and statistically significant influence on stock market capitalization growth over the study period which validates the unfavorable side of demand and supply theory. Granger causality results indicated that there is unidirectional causality running from trade openness, foreign direct investment, exchange rate and balance of payment to stock market capitalization growth. This study recommends the following: a need for policymakers to ensure effective implementation of existing monetary policy instruments and device strong way of harmonizing monetary and fiscal policies in order to maintain stable exchange rate and avoid structural break that affect the whole system including the stock market capitalization growth. There is the need for government to intensify its efforts in diversifying the economy that will help to have more active economic sectors that can contribute positively in reducing the existing foreign direct investment, exchange rate, crises and even boost the investment in the stock market capitalization growth.
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