Symmetric and asymmetric effects of exchange rate: Evidence from capital market and financial sector in Nigeria

• Published date: 01 December 2022
• Author: Ekundayo Peter Mesagan,Xuan Vinh Vo,Idimmachi Pius Amadi
• Date: 01 December 2022
• DOI: http://doi.org/10.1002/pa.2776

RESEARCH ARTICLE

Symmetric and asymmetric effects of exchange rate: Evidence

from capital market and financial sector in Nigeria

Ekundayo Peter Mesagan

1,2

| Xuan Vinh Vo

3

| Idimmachi Pius Amadi

4

1

School of Management and Social Sciences,

Pan-Atlantic University, Lagos, Nigeria

2

Institute of Business Research, University of

Economics Ho Chi Minh City, Ho Chi Minh

City, Vietnam

3

Institute of Business Research & CFVG,

University of Economics Ho Chi Minh City, Ho

Chi Minh City, Vietnam

4

Department of Economics, Covenant

University, Ota, Ogun State, Nigeria

Correspondence

Ekundayo Peter Mesagan, School of

Management and Social Sciences, Pan-Atlantic

University, Lagos, Nigeria.

Email: profdayoms@yahoo.com

Funding information

University of Economics Ho Chi Minh City,

Vietnam, Grant/Award Number: IBR_RF026

The study analyses the symmetric and asymmetric impacts of exchange rate volatility

and fluctuations, respectively on the capital market and financial sector in Nigeria.

This analysis entails using monthly data from January 2010 to April 2018 and the

autoregressive distributed lag (ARDL) bounds testing framework. The linear ARDL

result shows that exchange rate volatility negatively but significantly impacts finan-

cial development and capital market in the short-run and long-run. Results of the

asymmetric effect show that exchange rate depreciation negatively and insignifi-

cantly affects the capital market while exerting a significant positive impact on the

financial market in both short-run and long-run at about 0.06 and 0.04% respectively

for both sectors. However, currency appreciation positively influences the capital

market at 1.23 and 0.66%, but negatively affects the financial sector at 0.09 and

0.02% in the short- and long-run respectively. Thus, the study calls for effective pub-

lic policy management since exchange rate volatility and currency depreciation pose

a bad omen to the capital market. This entails public regulation of the key macroeco-

nomic indicators by encouraging the central bank to maintain interest rates that are

favorable toward expanding the productive capacity of private investors. Such policy

can also be supported by providing affordable access to investment funds.

KEYWORDS

ARDL, capital market, exchange rate, financial development, Nigeria

1|INTRODUCTION

The development of both the financial sector and capital market is

essential to the growth and development of a country as it defines

the strength of its currency vis-à-vis the other foreign currencies.

This, to a large extent, also shapes the interest of public affairs,

which sole aim is to regulate the activities of both financial sector

and capital market, through the activities of Central Bank and the

Securities and Exchange Commission. According to Levine (1997)

and Omojolaibi et al. (2016), the financial sector provides the

needed impetus to boost economic growth through its credit crea-

tion activities. The sector can also stimulate economic activities by

enhancing productive activities through credit allocation to the pri-

vate investors in desired areas of interest at a point in time

(Abdalla & Murinde, 1997; Mesagan, Ogbuji, Alimi & Odeleye, 2019;

Ogbuji et al., 2020). Again, the attempt by the financial operators to

develop the financial system requires a significant contribution from

the capital market. This is hinged on the fact that the capital market

provides support for financial firms to draw their funding and

improve their operations. Usually termed as a contact point in which

financial instruments with low liquidity and long maturity dates are

traded, the capital market also provides a means for local and for-

eign investors to acquire portfolio investments (Chatrath

et al., 1996; White & Woodbury, 1980). This brings to the fore how

exchange rate fluctuation impacts both the capital market and finan-

cial sector.

The reason for this present discourse is that exchange rate move-

ments can work through the channel of interest rate parity to deter-

mine the volume of inflow of foreign capital into the local stock

markets. It also has the potential to impact the financial sector

Received: 20 August 2020 Revised: 28 August 2021 Accepted: 4 October 2021

DOI: 10.1002/pa.2776

J Public Affairs. 2022;22(Suppl. 1):e2776. wileyonlinelibrary.com/journal/pa © 2021 John Wiley & Sons Ltd. 1of11

https://doi.org/10.1002/pa.2776