Bivariate volatility modelling of the impact of crude oil prices on Nigeria exchange rate
This study conducts a bivariate volatility analysis of crude oil prices and Nigeria’s exchange rate using data from 2010 to 2024 (180 observations). It employs descriptive statistics, cross-correlation, Granger causality, Johansen cointegration tests, and both VAR and DBEKK MGARCH frameworks to capture dynamic interactions and volatility persistence. The VAR results show a positive effect of crude oil prices on the exchange rate (0.1574, p = 0.0368) and mean reversion in the exchange rate (−0.158, p = 0.0344), with limited short-run causality at lag 1. DBEKK MGARCH estimates reveal pronounced volatility clustering with asymmetric persistence across series. Crude oil price volatility exhibits strong baseline and ARCH/GARCH dynamics, with A1(1,1) = 0.674 and B1(1,1) = 0.529, while cross-channel instantaneous spillovers are weak (M(1,2) = 0.287, not statistically significant, p = 0.872). The unconditional baseline reflects substantial volatility (M(1,1) = 12.986, p = 0.0216) and a persistent second channel with B1(2,2) = 1.010 and A1(2,2) = 0.286, indicating very strong persistence and long-lasting volatility in that channel. Exchange rate volatility is highly responsive to shocks, with A1(2,2) = 0.286 and B1(2,2) = 1.010, and M(2,2) = -2.474 (p<0.001), suggesting a damping but dominant persistence pattern in the second variance component. The cross-channel influence remains weak under diagonal BEKK, as evidenced by a non-significant M(1,2) and relatively small cross-covariance terms. Overall, a substantial long-run correlation exists between the volatility processes, linking oil-price and currency risks (strong co-movement in volatility). Implications emphasize continuous volatility monitoring and hedging to mitigate persistent risk, and policies to stabilize currency markets and enhance resilience to oil-price shocks through hedging, reserves management, and macroprudential tools.
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