Reactions of stock returns to asymmetric changes in exchange rates and oil prices

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Abstract

When an economy does well as a result of crude oil proceeds, it is expected that its financial market records a boost. So, when the economy regresses due to fluctuations in oil prices, its financial market also reacts in tandem. To shed light on the uninterrupted fluctuations, we empirically estimated the effect of changes in exchange rates and oil prices on stock returns in developing countries using the nonlinear autoregressive distributed lag (NARDL) methodology. Results reveal that a 1 percent negative shock to the exchange rate diminished returns significantly by 1.015 percent and 2.191 percent for Egypt and Nigeria respectively whereas, in Tunisia, Morocco, and Tanzania, stock returns increased significantly by 0.118 percent, 0.176 percent, and 1.145 percent respectively. For every 1 percent positive shock to exchange rates in Egypt, Nigeria, Tunisia, Morocco, and Tanzania, returns declined by 1.012 percent, 1.04 percent, 0.015 percent, 0.112 percent, and 0.214 percent respectively. A 1 percent positive shock in oil price negatively influences returns by 0.02 percent, 0.05 percent, 0.18% percent, 1.09 percent, and 0.25 percent in Egypt, Nigeria, Tunisia, Morocco, and Tanzania while a 1 percent negative shock stimulated stock returns by 1.02 percent, 0.128 percent, 0.199 percent, 1.029 percent and 0.091 percent in Egypt, Nigeria, Tunisia, Morocco, and Tanzania respectively. Different policy reaction functions should be executed differently for depreciation, appreciation, and oil price shock to enhance the favorable flow of returns in stock markets.

Keywords: Asymmetric Effect, Symmetric Effect, Oil Price Volatility, Changes in the Exchange Rate, Short-Term Deposit Rate, NARDL Model

Authors’ individual contribution: Conceptualization — D.U., S.E.E., F.E.O., and A.N.T.; Methodology — D.U., S.S.U., E.O., F.E.O., and A.N.T.; Software — D.U., S.E.E., C.A.O., and A.A.E.; Validation — D.U., E.O., and A.N.T.; Formal Analysis — D.U., S.E.E., S.S.U., E.O., M.A.U., C.A.O., F.E.O., A.N.T., and A.A.E.; Investigation — D.U., S.E.E., S.S.U., C.A.O., and A.A.E.; Data Curation — D.U. and A.N.T.; Writing — Review & Editing — D.U., M.A.U., F.E.O., and A.A.E.; Supervision — D.U., S.E.E., S.S.U., M.A.U., and A.A.E.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G12, G17, E43

Received: 30.08.2022
Accepted: 31.05.2023
Published online: 02.06.2023

How to cite this paper: Umoru, D., Effiong, S. E., Umar, S. S., Okpara, E., Ugbaka, M. A., Otu, C. A., Ofie, F. E., Tizhe, A. N., & Ekeoba, A. A. (2023). Reactions of stock returns to asymmetric changes in exchange rates and oil prices. Corporate Governance and Organizational Behavior Review, 7(3), 42–56. https://doi.org/10.22495/cgobrv7i3p4