Oil Price Volatility and Stock Market Performance

ABSTRACT

In this study, the effect of oil price volatility on the performance of the Nigerian stock market is examined using a combination of monthly and annual datasets for the period of 1986 to 2019. Different empirical analytical approaches are adopted in the investigation in the study. The bi-variate GARCH procedure of the VECH was used to evaluate the transmission of oil price instability into the Nigerian Stock market. Moreover, The ARDL technique was employed for examining the effect of frequent changes in the price of oil in the international market on the stock market in order to observe the dynamic (short run and long run) relationships, while the EGARCH technique was adopted in testing whether oil prices generated instabilities in the stock market in Nigeria. The main findings from the study indicate that volatility in oil prices are strongly linked with the long term behaviour stock market in Nigeria(especially in terms of stock prices) and that oil price volatilities are significantly transmitted into the stock market in Nigeria. There is also evidence that the effect of oil price volatility is observed in the stock market through the shocks that the volatilities generate in the economy. The effects of oil price volatility are also found to be limited to the short run in the stock market. The findings in the study imply that instabilities in the external sector (arising from international prices of oil) generate instability in the stock market directly and indirectly (through other macroeconomic variables). It is therefore, recommended that oil markets need to be de-linked from domestic markets in Nigeria.