FOREIGN EXCHANGE RATE DYNAMIC AND THE BANKING SECTOR STOCK PERFORMANCE IN NIGERIA

Abstract

This study examines the impact of foreign exchange rate dynamics and the banking sector stock performance in Nigeria, utilizing the Granger Causality test and the Autoregressive Distributed Lag (ARDL) model. The research adopts an ex-post facto design and analyzes secondary data sourced from the Central Bank of Nigeria (CBN) and the Nigerian Stock Exchange. Findings reveal a unidirectional causality from exchange rate volatility to banking stock prices, consistent with the flow-oriented theory, indicating banks’ vulnerability to forex fluctuations due to their exposure to foreign-denominated assets and transactions. The ARDL results show that while exchange rate volatility and broad money supply have no significant impact, external reserves, interest rate, and inflation significantly influence banking sector stock prices in both the short and long run. External reserves and interest rates exhibit negative effects, while inflation shows a positive relationship, suggesting that bank stocks may act as a hedge against inflation. These outcomes highlight the critical role of macroeconomic fundamentals in shaping equity market behavior in Nigeria’s financial sector. The study recommends that policymakers prioritize economic diversification to strengthen foreign reserves, stabilize interest rates through prudent monetary policy, and enhance inflation-targeting frameworks to support banking sector stability and investor confidence.