EFFECT OF EXCHANGE RATE ON EQUITY RETURNS IN THE NIGERIAN STOCK EXCHANGE: EVIDENCE FROM FINANCIAL SERVICE STOCKS.

ABSTRACT

          This study examines the impact of exchange rate fluctuations on equity returns in Nigeria, specifically focusing on financial service stocks within the Nigerian Stock Exchange (NSE). Employing an Error Correction Model (ECM), the analysis reveals a significant positive relationship between exchange rate changes and equity returns, with a coefficient of 0.797316 and a p-value of 0.0336. This indicates that higher exchange rates enhance equity returns in the financial services sector. Conversely, the interaction term involving Foreign Direct Investment (FDI) and exchange rate fluctuations shows no significant effect, while increased FDI alone negatively impacts equity returns, suggesting competitive pressures. Higher interest rates also negatively influence equity returns, as expected. However, the Market Index's impact on equity returns is statistically insignificant. The findings highlight the importance of effective exchange rate management, prudent interest rate policies, and cautious FDI strategies to foster a resilient financial market in Nigeria. These insights are crucial for investors, policymakers, and researchers in understanding the dynamics of equity returns amidst exchange rate movements.