




































 
 

The Effects of Trade Openness and Exchange Rate on Stock Market 

Capitalization Growth in Nigeria 

 

Owoade,N.L. and Ogunlowo,D. T. 

Department of Economics, College of Management Sciences (COLMAS), Michael Okpara 

University of Agriculture Umudike. 

 

ABSTRACT 
This study examines the linkage among trade openness, exchange rate on stock market 

capitalization growth in Nigeria, using annual data from 1981 to 2017. In conducting the 

analysis, this study utilized Vector Error Correction model and Granger Causality tests. Trade 

openness, foreign direct investment, exchange rate, balance of payment and stock market 

capitalization growth were captured in the model. The results show that trade openness, and 

balance of payment have positive and statistically significant impact on stock market 

capitalization growth in Nigeria, while foreign direct investment and exchange rate have 

negative and statistically significant influence on stock market capitalization growth over the 

study period which validates the unfavorable side of demand and supply theory. Granger 

causality results indicated that there is unidirectional causality running from trade openness, 

foreign direct investment, exchange rate and balance of payment to stock market 

capitalization growth. This study recommends the following: a need for policymakers to 

ensure effective implementation of existing monetary policy instruments and device strong 

way of harmonizing monetary and fiscal policies in order to maintain stable exchange rate 

and avoid structural break that affect the whole system including the stock market 

capitalization growth. There is the need for government to intensify its efforts in diversifying 

the economy that will help to have more active economic sectors that can contribute 

positively in reducing the existing foreign direct investment, exchange rate, crises and even 

boost the investment in the stock market capitalization growth. 

1. Introduction 

Efficient trade openness, Exchange rate stability and stock market capitalization growth are 

the three economic objectives that every country needs to achieve, this is because the 

financial position of every economy be it developed or developing can be accessed from its 

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exchange rate stability (Bala and Hassan, 2018). Trade openness in the developing countries 

became a household terminology in the 1990s, which in term of definition, is, external 

opening of the economy and increase role of markets domestically (that is the market 

economy) to developing world, modern way of running an economy (Loto, 2010). The 

essence of trade openness mainly is as a basis for moving the economy towards external 

liberation, focusing on market oriented system of government. Since the late 1980s, the 

pace of trade openness has rapidly quickened with the world trade rising nearly as fast as 

world Gross Domestic Product. This has been characterized by the trade openness; Exchange 

rate stability and stock market capitalization growth are accelerated by private capital flows 

(Adam, 2003). The recent growth of stock exchange market, through increase in cross-

border capital movement has been attributed to the removal of statutory restriction on the 

capital account transactions and economy liberalization. (International Monetary Fund, 

2003) attributed another impact of growth of stock market globally on macro-economic 

stabilization policy reforms in the developing countries which is privatization, liberalization 

of trade and growth of stock. Stock exchange is a medium to encourage savings, help 

channel savings into productive investments. The emphasis on the growth of stock market 

for domestic resource mobilization has also been strengthened by the need to attract 

foreign capital (Idele, 1999). 

According to (Hassan, Abubakar, and Dantama, 2017) a very strong exchange rate is a signal 

that shows strong and viable stock market capitalization growth. While on the other hand a 

very weak currency is a reflection of a very vulnerable and weak stock market capitalization 

growth. Exchange rate instability has real stock market capitalization growth shocks because 

it negatively affects prices level, firms’ profits and even the entire activity in an economy. 

Similarly, stock market plays crucial role in economic development of every nation, stock 

market serves as a transmission mechanism upon which savings are mobilized and 

adequately distributed across the economic sectors with the view to realize inclusive 

growth. Exchange rate and stock market price are interconnected directly or indirectly, 

because today, world is turning into a global village due to trade liberalization and 

globalization. For instance, foreign investors are busy investing their capital in the world 

stock markets. In this process international investment is booming rapidly and capital is 

moving across the world (Bala and Hassan, 2018). The benefits of these investors are being 

determined by foreign exchange rate. Moreover, instability in the exchange rate may bring 

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about uncertainty or otherwise in these investors. Thus, exchange rate is the important 

determinant of stock market fluctuations (Khan and Ali, 2015). In Nigeria, the value of naira 

experienced high degree of volatility recently, for example, statistical records have shown 

that from 2006 to 2008 the value of naira to US$ was 125, which further depreciated from 

150.3 in 2010 to average of 153.90, 156.81, 305.25 and 306.45 per US$ dollar in 

2011, 2013, 2017 and 2018 respectively. In the same vain the stock market moves so strong 

in the same direction with the currency exchange rate, statistically, stock market collapsed 

by about 70% between 2008-2009. In addition, the All Share Index (ASI) as measure of stock 

market performance has persistently declined from 65,652.38 in 2008 to less than 30,000.00 

points in 2012. It however, increases from 31,853.19 to 41,210.10 points between 2013 and 

2014, after which in continuously declined to less than 31,853.19 points from 2015 to date 

(Central Bank of Nigeria, 2018). 

A liquid stock market development offers the potential for investors to quickly and cheaply 

alter their portfolios thereby reducing the riskiness of their investment, thus, facilitating 

investments in projects that are more profitable (Ezeabisili and Alajekwe, 2012). Without a 

liquid stock market, many profitable long-term investments would not be undertaken 

because savers would be reluctant to tie up their investments for long periods of time 

(Okonkwo, Ogwuru and Ajudua, 2014). A well-functioning stock market fosters growth and 

profit incentives and also helps in risk management (Beck and Levine 2012). It has also been 

observed that more developed market may provide liquidity that lowers the cost of the 

foreign capital essential for development, especially in low income countries that cannot 

generate sufficient domestic savings. However, the concern about the stock market growth 

in Nigeria is the impact of globalization on the market. It has not been clearly ascertained 

whether globalization especially through increased Foreign Direct Investment (FDI) generate 

positive impact or otherwise on the stock exchange market. Though the effect of 

globalization has not been undoubtedly looked at by many, trade openness has impacted on 

most factors identified in the literature to be determinants of stock exchange market growth 

(Obstfied, 2002). Specifically, the role of stock market in economic development cannot be 

overemphasized; the liquidity of stock (capital investment) has been noted. Many profitable 

investments require a long-term commitment of capital but investors might not want to tie 

up their savings for such long periods. Until recently, Nigerian stock markets have not 

performed impressively when compared to those in other regions of the world. However, 

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Nigerian stock exchange has experienced significant gains in the entry of the new 

millennium: market capitalization and new listing no doubt have increased. These changes 

have taken place within the context of globalization and internationalization policies that 

reflect the effort of the government to use stock markets as a means of privatization and 

engine growth of the economy. Against this background, this study is designed to under-

study the effect of trade openness and exchange rate on stock market capitalization growth 

in Nigeria. 

The objective of this study is to examine the effects of trade openness and exchange rate on 

stock market capitalization growth in Nigeria. To achieve the objective, this study is 

structured into five sections including this introduction. Section two and three contains 

review of related literature and methodology. While section four and five comprises findings 

of this study and conclusion and recommendations correspondingly. 

2. Review of Related Literature 

Theoretical Literature 

Demand- Supply Theory 

It is also referred to as theory of exchange rate. The theory stresses that the rate exchange 

basically relates to the position of balance of payments of the country concerned. A 

favourable balance of payments leads to an appreciation in the external value of the 

currency of the country. Unfavorable balance of payments causes a depreciation of the 

external value. The exchange rate holds that the price of foreign money in terms of domestic 

money is determined by the free forces of demand and supply in the foreign exchange 

market. It follows that the external value of a country’s currency will depend upon the 

demand for and supply of the currency. 

The theory states that the forces of demand and supply are determined by various items in 

the balance of payments of a country. According to the theory, a deficit in the balance of 

payments leads of a fall or depreciation in the rate of exchange, while a surplus in the 

balance of payments strengthens the exchange reserves, causing an appreciation in the price 

of home currency in terms of foreign currency. A deficit balance of payments of a country 

implies that demand for foreign exchange exceeds its supply. As a result, the price of foreign 

money in terms of domestic currency must rise, i.e., the exchange rate of domestic currency 

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must fall. 

On the other hand, a surplus in the balance of payments of a country implies a greater 

demand for home currency in a foreign country than the available supply. As a result, the 

price of home currency in terms of foreign money rises, i.e., the rate of exchange improves. 

In short, the balance of payments theory simply holds that the exchange rates are 

determined by the balance of payments, connoting demand and supply positions of foreign 

exchange in the country concerned. As such, this theory is also designated as “Theory of 

exchange rate,” the theory asserts that the rate of exchange is the function of the supply of 

and demand for foreign money and not exclusively the function of prices obtaining between 

two countries as asserted by the Purchasing Power Parity Theory which does not take into 

account invisible items. According to the demand and supply theory, the demand for foreign 

exchange arises from the “debit” items in the balance of payments, whereas the supply of 

foreign exchange arises from the “credit” items. Since the theory assumes that the demand 

for and supply of foreign currency are determined by the position of the balance of 

payments, it implies that supply and demand are determined mainly by factors that are 

independent of variations in the rate of exchange or the monetary policy.Demand-Supply 

Theoryshould be adopted because it portrays the framework of trade openness and 

exchange rate on stock market capitalization growth which the model will adopt. 

 

Empirical Literature Review 

Many studies have covered globalization and stock market growth from different 

perspectives, and examined focused variables and their relationship differently. Most 

relevant and useful studies for this study are included.  

Torre and Schmuker, (2007), found out that stock market development is positively related 

to globalization in Nigeria through the use of single regression. This work shows that reform 

and globalization of capital market increases domestic market capitalization, trading and 

capital raising, increases in the chain of activity in international equity markets can 

contribute to the spread at least practices in corporate governance, accounting rules and 

legal traditions. Internationalization is a reality and no country of the world is immune to its 

impacts.  

Maduka, Madichie, and Eze, (2017) examine the impact of globalization on economic growth 

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in Nigeria. The study uses the contemporary econometric techniques of co-integration and 

error correction mechanism within the framework of the Pesaran, Shin and Smith. (2001) 

ARDL model Using annualized secondary time series data from 1970 to 2015, the study 

reveals that trade openness; financial integration and foreign direct investment have 

significant positive impact on economic growth in Nigeria. Thus, adequate mechanism 

should be put in place to ensure that globalization brings about the desired pace of 

economic growth. 

Araoye, Ajayi, and Aruwaji, (2018) study examined the impact of the Nigerian Stock market 

development on the nation’s economic growth from 1985 to 2014. The economic growth 

was proxy by the GDP while the stock market variables considered included; market 

capitalization and market turnover ratio as proxy for stock market development in terms of 

size and liquidity. The study utilizes the Johansson’s co integration long run relationship test 

does existing between establish stock market development and economic growth in Nigeria. 

The empirical results suggest that the stock market is significant in determining economic 

growth in Nigeria using the error correlation model and it was found that the stock market 

has impacted insignificantly on the economic growth. 

Bala and Hassan, (2018) study examines the linkage between exchange rates and stock 

market in Nigeria using annual data from 1985 to 2015. In conducting the analysis, this study 

utilized Autoregressive Distributed Lag (ARDL) model and Granger Causality tests. Exchange 

rate, economic growth, money supply and stock market (i.e., all share indexes) were 

captured in the model. The results show that exchange rate and economic growth have 

positive and statistically significant impact on stock market in Nigeria, while money supply 

has negative and statistically significant influence on stock market over the study period.  

Onwuka and Eguavoen (2007), studied globalization and its implications for the growth 

process of the Nigeria economy for the period 1985–2001. Using descriptive method of 

analysis, the study revealed that Nigeria has not benefited from globalization due to mono-

cultural export, inability to attract increased foreign investment and huge indebtedness. 

Omolade, Morakinyo and Ifeacho (2013), investigated the nexus between globalization and 

economic development of Nigeria over the period 1980–2011. The study employed 

Johansen co-integration and Granger causality tests and revealed that trade openness 

relates negatively with economic development in Nigeria. The study further revealed that a 

unidirectional causality flows from economic development to globalization without such in 

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reversed order and that trade partners appear to be gaining more than the country 

especially the developed trade partners. 

Sede and Izilein (2013) examined the causal relationship between economic growth and 

globalization in Nigeria. In carrying out the study, Johansen co-integration, Granger causality 

and variance decomposition tests were employed. The study found that globalization does 

not Granger-cause economic growth in Nigeria. 

Nwakanma and Ibe (2014) examined the causal relationship between globalization and 

economic growth in Nigeria from 1981 to 2012. In carrying out the study, Johansen co-

integration and Granger causality tests were employed. The results show that there is a 

positive and insignificant relationship between financial integration, human resource 

development and trade openness, while gross fixed capital formation was negative and 

insignificant. The results further revealed that a unidirectional causality runs from financial 

integration to gross fixed capital formation. 

Okpokpo, Ifelunini and Osuyali (2014), through their study interrogated globalization as a 

potent driver of economic growth in Nigeria using the non-oil (agricultural and 

manufacturing) export as reference point from 1970–2011. The study employed the ADF 

unit root test and OLS technique and found that globalization has no significant impact on 

non-oil export and that globalization has not been a potent driver of growth of the non-oil 

export in Nigeria. 

Shuaib, Ekeria and Ogedengbe (2015), examined the impact of globalization on the growth 

of the Nigerian economy over the period 1960 –2010. The study employed the Johansen co-

integration and error correction model and found that growth of external debt ratio was 

inversely related to economic growth in Nigeria. 

Adesoye, Ajike and Maku (2015), examined the impact of economic globalization on output 

growth of the Nigerian economy over the period 1970 –2013. The study employed Engle-

Granger co-integration and error correction model and found that a higher exchange rate 

and inflation rate, an increase in foreign direct investment, growth in trade and openness 

and a lesser interest rate enhance the growth rate of output in Nigeria. 

3. Methodology 

To examine the relationship among the variables, this study applied Augmented Dickey-

Fuller (ADF) statistics where used to test the stationarity or non-stationarity of the variables 

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and their order of integration. The Johansen co-integration technique would be used to test 

for long run relationship between the variables. The VECM would be applied to estimate the 

speed of adjustment and causality test to examine the long run causal relationship between 

variables.This study also used annual data spanning from 1981 to 2017. This is the period for 

which all the data of the variables under assessment are available. The data is sourced from 

statistical Bulletin a publication of Central Bank of Nigeria, World Development Indicators, a 

publication of World Bank, and Nigerian Bureau of Statistics. The variables captured in the 

equation are Stock market capitalization growth (SMCG) as the explained variable, and Trade 

openness (TO), foreign direct investment (FDI), exchange rate (EXR) and balance of payment 

(BOP) as explanatory variables. 

Model specification 

This study analyze the effects of trade openness and exchange rate on stock market 

capitalization growth in Nigeria, which would be based on The model coined from the 

publication of Ajayi, Araoye and Aruwaji(2018),which have investigated the linkage between 

stock market and economic growth, but with slight modifications.To explain the relationship 

between Stock market capitalization growth and other economic variables in Nigeria 

economy, the model is specified below: 

Stock market capitalization growth (SMCG) = f (Trade openness (TO), Foreign direct 

investment (FDI), Exchange Rate (EXR), Balance of payment (BOP)………… (3:1) 

Let derive equation (3:2) from equation (3:1) 

SMCG = f (TO, FDI, EXR, BOP)………………………………..………… (3:2) 

Let converted equation (3:2) into econometric model for Objective (1) 

SMCG t = b0 + b1TO t + b2FDI t + b3EXR t + b3BOPt + U1t………………………………… (3:3) 

Where: 

Stock market capitalization growth = SMCGt 

Trade openness (TO) = TOt 

Foreign direct investment = FDI t 

Exchange Rate = EXR t 

Balance of payment = BOPt 

b0 = Intercept of the relationship 

b1, b2, b3 = Measure of the slope 

U = Error term. 

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4. Discussion of Findings 

When dealing with time series data, it is important to test the series’ behavior so as to know 

the stationary levels. Economic theory requires that variables be stationary before 

application of standard econometric techniques, this is to avoid misleading results. This has 

been carried out through the use of most frequently used testing techniques of Augmented 

Dickey Fuller. 

Variables ADF statistics  

ADF 

statistics   

 Level Critical values 

1st 

difference Critical values 

SMCG 0.569014 1% -3.626784 -5.859350 1% -3.632900 

  5% -2.945842  5% -2.948404 

  10% -2.611531  10% -2.612874 

TO -0.989652 1% -3.626784 -6.439743 1% -3.632900 

  5% -2.945842  5% -2.948404 

  10% -2.611531  10% -2.612874 

FDI -1.368560 1% -3.626784 -8.325831 1% -3.632900 

  5% -2.945842  5% -2.948404 

  10% -2.611531  10% -2.612874 

EXR -0.411637 1% -3.626784 -3.769794 1% -3.632900 

  5% -2.945842  5% -2.948404 

  10% -2.611531  10% -2.612874 

BOP -5.087645 1% -3.626784 -9.612322 1% -3.632900 

  5% -2.945842  5% -2.948404 

  10% -2.611531  10% -2.612874 

Source: Author`s Compilation 

The ADF results show that Stock market capitalization growth, Trade openness, Foreign 

direct investment, Exchange Rate are non-stationary in level, but stationary in difference. 

While Balance of payment is stationary both in level and 1st difference indicating that the 

variables are of different order of integration.  

Co-integration Test Result  

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Having confirmed the stationary nature of the variables a necessary but not sufficient 

condition for co-integrating test is that each of the variables as different integrated order. 

The Johansen co-integration test uses two statistics test namely; the trace test and the 

likelihood Eigen-value test. The results obtained from the likelihood Eigen-value testis 

summarized in table below. 

Hypothesized 

No. of CE(s) Eigen-value 

Max-Eigen 

Statistic 

Critical Value 

0.05 Prob.** 

None * 0.691196 41.12672 33.87687 0.0057 

At most 1 * 0.624325 34.26609 27.58434 0.0060 

At most 2 0.226095 8.970734 21.13162 0.8348 

At most 3 0.164041 6.271130 14.26460 0.5787 

At most 4 * 0.127562 4.776216 3.841466 0.0288 

Source: Author`s Compilation 

Max-eigenvalue test indicates 2 cointegratingeqn(s) at the 0.05 level 

Denotes rejection of the hypothesis at the 0.05 level 

Max-Eigen statistics indicates the presence of two co-integrating equation at 5% significance 

level which implies that Stock market capitalization growth, Trade openness, Foreign direct 

investment, Exchange Rate, Balance of payment are co-integrated. This shows that there is a 

long-run relationship among Stock Market Capitalization Growth, Trade Openness, 

ForeignDirect Investment, Exchange Rate, and Balanceof Payment in Nigeria. 

Vector Error Correction Model (VECM) Result 

Since there is co-integration, the vector error correction model is estimated, TOanswerH0�: 

There are no significant effects of trade openness, exchange rate on stock market 

capitalization growth in Nigeria. 

Variable α's ECM 

SMCG(-1)  1.000000  0.254556 

   (0.09328) 

  [ 2.72882] 

   

TO(-1)  405285.2  

  (120887.)  

 [ 3.35259]  

   

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FDI(-1) -0.016014  

  (0.00187)  

 [-8.56286]  

   

EXR(-1) -61956.62  

  (14095.7)  

 [-4.39543]  

   

BOP(-1)  10.92668  

  (2.30818)  

 [ 4.73390]  

   

C  4459143.  

R-squared= 0.321034 
Note: The t-statistics [] are inParentheses  
Source: Author`s Compilation 

Interpretation of VECM Results 

ECTt-1=1.0000SMCGt-1+405285.2Tot-1-0.016014FDIt-1 - 61956.62EXRt-1 + 10.92668BOPt-1 + 

4459143 

 

The coefficient of TO is 405285.2 with a t-value of 3.35259. Since the t-value is greater than 

2 in absolute sense, we reject the null hypothesis at 5% level of significance using the 2-t 

rule of thumb. This means that trade opening is statistically significant and affects Stock 

market capitalization growth in Nigeria. Specifically a unit increase in trade openness will on 

average increase Stock market capitalization growth by 405285.2 ceteris paribus. The 

positive sign of trade opening is unrealistic in Nigeria, in the sense that both foreign direct 

investment and exchange rate is negative, it will be actualize if only the government can 

control the domestic productive system, and be at advantage side of globalization. 

The coefficient of FDI is -0.016014 with a t-value of -8.56286. Since the t-value is greater 

than 2 in absolute sense, we reject the hull hypothesis at 5% level of significance using the 2-

t rule of thumb. This means that foreign direct investment statistically significantly affects 

Stock market capitalization growth in Nigeria. Specifically a unit increase in foreign direct 

investment will on average decrease Stock market capitalization growth by -0.016014% 

ceteris paribus. The negative sign of foreign direct investment validates the unfavorable side 

of ‟Demand- Supply Theory”, in the sense that multinational company import their advance 

technology and labour (semi-skilled) from their country and utilize the domestic materials, 

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their profits are transferred back to their country which results to capital flight in the 

economy. 

The coefficient of EXR is -61956.62 with a t-value of -4.39543. Since the t-value is greater 

than 2 in absolute sense, we reject the hull hypothesis at 5% level of significance using the 2-

t rule of thumb. This means that exchange rate statistically significantly affects Stock market 

capitalization growth in Nigeria. Specifically a unit increase in exchange rate will on average 

decrease Stock market capitalization growth by -61956.62 ceteris paribus. The negative sign 

of exchange rate validates the unfavorable side of ‟Demand- Supply Theory”, this effect can 

only be correct by checkmating all the variables that are affected domestically. 

The coefficient of BOP is 10.92668 with a t-value of 4.73390. Since the t-value is greater than 

2 in absolute sense, we reject the hull hypothesis at 5% level of significance using the 2-t 

rule of thumb. This means that balance of payment statistically significantly affects Stock 

market capitalization growth in Nigeria. Specifically a unit increase in exchange rate will on 

average increase Stock market capitalization growth by 10.92668 ceteris paribus. The 

positive sign of the balance of payment is unrealistic in Nigeria, in the sense that both 

foreign direct investment and exchange rate is negative, it will be actualize if only the 

government can diversify the production system, in a way that export will exceed import.  

R-Squared measures the percentage of the total variation in the dependent variable that is 

explained by the explanatory variables. In the model, the total variation in SMCG jointly 

explained by the variations in TO, FDI, EXR and BOP is 32.11%. This means that the 

explanatory variables are able to explain close to optimum total variations in the dependent 

variable. Adjusted R-squared penalizes the model for introducing unimportant variables. 

From the model above, the R2 adjusted penalizes the model by decreasing from 32.11% to 

17.55%. 

Interpretation of Vector error correction term:  

SCMGt= 0.254556ECTt-1 - 0.307988 SCMGt-1- 186483.0 TO t-1 + 0.002058 FDI t-1 + 

37955.04 EXR t-1 - 3.256091 BOP t-1 + 703392.8 

The coefficient of the ECTt-1 indicates that 57.1% of the disequilibrium in the model will be 

corrected annually. In other words, 26% of disequilibrium in the short run will be corrected 

in the long run. The speed of adjustment indicates that the model will converge completely 

to its equilibrium system in 2.73 years. The significance result of ECM indicates that speed of 

adjustment will be very fast. This result is shown in the appendix index. 

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The optimum lag length of 11 was selected based on AIC and SBC information criteria for all 

ECM estimate above. This means that the convergence between the variables is not 

instantaneous. 

Granger Causality Test 
Granger Causality test shows that, there is unidirectional causality running from Trade 

openness, Foreign Direct Investment, Exchange Rate and Balance of Payment to Stock 

Market Capitalization Growth as a result of the one way significant p-value of F-statistic 

(0.0786, 0.0005), (0.7237,0.0013),(0.3197, 0.0274) and (0.0020,0.6379). Therefore, we 

accept alternative-hypothesis and conclude that Trade openness, Foreign Direct Investment, 

Exchange Rate and Balance of Payment have significant effect on Stock Market Capitalization 

Growth.  

5. Summary, Conclusion and Recommendations 

Nigeria has over the years experienced numerous challenges such as exchange rate 

fluctuations, collapse in the stock market price among others. It is on this basis that this 

study analyzed the effect of trade openness and exchange rate on stock market 

capitalization growth in Nigeria from 1981 to 2017. Following an extensive review of 

theoretical and empirical literatures, the study estimated a vector error correction model 

with stock market capitalization growth as the dependent variable and trade openness, 

foreign direct investment, exchange rate and balance of payment as the independent 

variables. Also co-integration was used to examine the long-run effect and Granger Causality 

Test to examine the exact causal relationship. 

The findings of the study capturing both the short-run and long-run are hereby stated for 

better policy guidance. Trade openness was observed to be significant to stock market 

capitalization growth in Nigeria, in developed countries, resources from trade openness such 

as export and import are used to develop sectors simultaneously but in less developed 

country like Nigeria; the one case is different because the dependency on import rather than 

export will affect the growth of the other sectors and have negative effect on stock market 

capitalization growth. Foreign direct investment was observed to be significant to growth. 

Foreign direct investment has a negative impact on stock market capitalization growth in 

Nigeria, this shows that there is a negative relationship between net flows of foreign direct 

investment and stock market capitalization growth. Exchange Rate was observed to have a 

negative impact on stock market capitalization growth and it is a statistically significant 

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variable affecting the growth rate of stock market capitalization growth meaning that a 

negative relationship exists between Exchange Rate and stock market capitalization growth. 

Balance of Payment has a positive impact on stock market capitalization growth and it is 

statistically significant, meaning that in Nigeria, a positive relationship exists between 

Balance of Payment and stock market capitalization growth.  

The result above validates the unfavorable side of ‟Demand-Supply Theory” which assert 

that, favorable balance of payments leads to an appreciation and Unfavorable balance of 

payments causes depreciation in the external value of the currency of the country. Also, the 

exchange rate holds that the price of foreign money in terms of domestic money is 

determined by the free forces of demand and supply in the foreign exchange market. It 

follows that the external value of a country’s currency will depend upon the demand for and 

supply of the currency. Also the result shows that, both foreign direct investment and 

exchange rate are unfavorable in relation to stock market capitalization growth, which 

means, for Nigeria to experience the actual positive effect or favorable as shows by both 

trade openness and balance of payment, government need to developed all the domestic 

economic sectors in a way that, their output export will exceed import and augment stock 

market capitalization growth in Nigeria 

 
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