Variance, Estimation Intervals and Foreign Exchange Market: COVID-19 Induced Evidence from Nigeria

Chukwu Agwu Ejem, Maxwell Onyemachi Ogbulu


The position of Nigeria in the comity of Nations, mostly as an oil exporting nation, makes it imperative to ascertain exchange rate risk amidst economic vagaries such as the COVID-19 pandemic ravaging the country and the world at large. For that, this study is conceived to examine the relationship between Conditional Variance and Exchange rate Market amidst COVID-19 pandemic ravaging the entire globe with emphasis in Nigeria using different estimation intervals (daily, weekly, and monthly) of exchange rate price computed from the exchange rate between the United State of America Dollars and the Nigeria Naira sourced from the Central Bank of Nigeria Statistical bulletin. ARCH, GARCH and EGARCH were employed for the analysis of secondary data collected from the Central Bank of Nigeria Statistical bulletin. For strong inferences, adequate comparison and concrete policy recommendations that will guide investors and other economic agents, the scope of this study is dissected into two periods; period preceding the outbreak of COVID-19 pandemic (pre-COVID-19 period) in Nigeria (February 26, 2018, to February 26, 2020) and two years into the pandemic (COVID-19 period) (February 27, 2020, to February 27, 2022) inclusive. In the pre-COVID-19 period, it was discovered that high volatility heralded the exchange rate market. The asymmetry parameter was found to be positive and significant level for both daily and weekly exchange rates, suggesting presence of leverage effects in the foreign exchange market in Nigeria within the scope of the study. It was also found that the conditional volatility (capturing the exchange rate-volatility relationship) for the daily exchange rate was negative and significant, while insignificant on a weekly basis. This shows that investors or speculators in the foreign exchange market are not adequately rewarded for taking additional risks in the pre-COVID-19 period. The persistent parameter was found to be significant for all the intervals, suggesting volatility in exchange rate price between Naira and US Dollar is persistent in the pre- COVID-19 period in Nigeria. It was also found that in the COVID-9 period there is a significant relationship between the price series and their lagged values, indicating that historical exchange rate prices on daily interval could be used to predict current and future prices in the foreign exchange market. It is suggested that the Central Bank of Nigeria initiates measures to forestall the persistent rise in the price of exchange rate experienced in COVID-19 period which has made the exchange movement become volatile and predictable. If such measures are taken, it will restore the evaporated trust and confidence in the foreign exchange market. This study has theoretical and practical implications for exchange rate management in Nigeria.

Keywords: Exchange rate price, COVID-19 pandemic, Volatility Modelling, Purchasing Power Parity, ARCH family, Nigeria.

DOI: 10.7176/RJFA/14-16-09

Publication date:August 31st 2023

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