Oil Price Volatility and Stock Returns: A case of Listed Nigerian Firms

Abstract

This paper provides empirical evidence to support the argument that oil prices impacts stock market performance in Nigeria. The major gaps observed in related studies were methodological: they employ models that do not properly analyse the dynamic process of how oil prices affect the performance of the stock market. Using daily data collected on daily basis for the Nigerian stock market and global crude oil price (the Brent) over the period November 2007 to July 2009, Autoregressive distributed lag (ADL) model was employed for the analysis. It was found that oil prices have a positive impact on the performance of the Nigerian stock market after a dynamic response lag of seven days. Contrary to the argument that oil prices do not affect stock market performance, the study concluded that stock markets are sensitive to oil prices in Nigeria. The major policy implication drawn from the study was that stabilizing oil prices in Nigeria and shielding the Nigerian stock market away from oil market shocks (by tightening regulation) would help to minimize the adverse effect that oil prices could have on stock prices. The major challenge however is that, while the stabilization of oil prices is important for overall macroeconomic management, oil prices are in turn driven by demand, supply and speculative factors across the globe.

Key Words: Oil Price Volatility, Stock Returns, Listed Nigerian Firms