IMPACT OF FINANCIAL VARIABLES ON EXCHANGE RATE VOLATILITY IN NIGERIA

Nigeria has continually experienced a prolonged period of exchange rate volatility despite all the efforts put by the CBN via its monetary policy variables to stabilize it. Its explosive nature has marred the economy (merchandise trade, economic growth, inflation, capital flows, and so on) beyond the layman factors, especially in the financial market, and to have a viable and inflationary pressure free economy; government and its agencies need to minimize the negative effect of exchange rate fluctuation to the barest minimum. Thus, this study unraveled the nexus between financial variables and exchange rate volatility in Nigeria using monthly data from January 1995 to December 2024; the independent variables are interest rates, money supply, inflation rates and Nigeria stock market indexes while exchange rate volatility was the dependent variable. The study employed generalized autoregressive conditional heteroscedacity (GARCH 1.1) and linear autoregressive distributed lag (ARDL). According to the trend analysis, the study showed the presence and persistence of volatility in exchange rate in Nigeria. The result also showed that money supply and inflation rate repeatedly experienced volatility. The regression estimates indicated the presence of a long-run relationship between money supply, Nigeria stock market indexes and exchange rate volatility in Nigeria. Based on the findings, the study concludes that financial variables positively impacted exchange rate volatility. Consequently, the study recommended that government should ensure a robust financial market development with a stable exchange rate and take cautions in making policies that could precipitate financial market imbalances by depreciating the local currency. In addition, the Central Bank of Nigeria should employ both conventional and unconventional monetary policies to tackle inherent inflationary pressure in the country and should be careful in making policies to influence these financial variables in a particular direction.