VOLATILITY SPILLOVER EFFECT OF EXCHANGE RATE ON SECTORAL STOCK RETURNS IN NIGERIA

Abstract

This study investigates the volatility spillover effects of exchange rate fluctuations on sectoral stock returns in Nigeria using the Exponential GARCH (EGARCH) model, complemented by the Augmented Granger Causality framework. Employing an ex-post facto design, the research utilizes monthly time-series data from 2005 to 2023, sourced from the Central Bank of Nigeria (CBN) and the Nigerian Exchange Group (NGX). Empirical findings reveal heterogeneous transmission of exchange rate volatility across sectors, with no significant spillover observed in the banking and consumer goods sectors, indicating their relative insulation from currency fluctuations. In contrast, the insurance and oil & gas sectors exhibit significant volatility spillover effects, demonstrating strong sensitivity to movements in the exchange rate. These results support the Volatility Spillover Theory, which posits that shocks in one financial market can propagate to other sectors, with the magnitude of transmission depending on sectoral exposure to the initial shock. The study also finds strong return persistence across all sectors, while innovation, leverage, and asymmetry effects vary according to sectoral structure and macroeconomic sensitivity. Based on these findings, investors are advised to diversify portfolios by combining assets from relatively stable sectors, such as banking and consumer goods, with those more vulnerable to exchange rate shocks. Policymakers are encouraged to strengthen foreign exchange management, enhance insurance sector stability, and implement targeted sector-specific risk-mitigation frameworks to foster resilience in Nigeria’s stock market.