The Effect of Misalignment in Exchange Rate during Pre and Post Liberalization Periods

Abstract

This study investigates the relationship between exchange rate misalignment and stock market volatility during pre and post financial liberalization era in Nigeria. This study uses quarterly data between 1985Q1 and 2011Q4 where the period of 1985Q1 to 1995Q2 represented the pre-financial liberalization era and 1995Q3 to 2011Q4 for post-financial liberalization. In testing our formulated hypotheses we adopted some statistical analysis such as descriptive statistics, correlation matrix and error correction model. To this end, our result shows that exchange rate misalignment had a positive but insignificant relationship with stock market volatility before the deregulation of the financial market in Nigeria. In the era of financial liberalization we observed that exchange rate misalignment had a negative and insignificant relationship with stock market volatility in Nigeria. We also find out that the adoption of financial liberalization policy in Nigeria had a positive but insignificant impact on stock market volatility. Finally, we therefore recommend that stable exchange rate policies that minimizes misalignment be pursed so as avoid significant stock market volatility and that liberalization of financial market should be encourage since the adoption could not be attributed to being the cause of volatility in Nigeria stock market.

Keywords: Exchange Rate Misalignment, Financial Liberalization, Stock Market Volatility