Oil Shocks and The Nigerian Stock Market (1986-2025)

This study examines the dynamic relationship between oil price shocks and Nigerian stock market returns, covering the period from January 1986 to December 2025, using monthly data. Nigeria presents a compelling laboratory for such investigation: as Africa's largest oil producer and a country whose macroeconomic fortunes are inextricably linked to global crude oil markets, understanding how oil price movements transmit to equity markets carries significant implications for investors, policymakers, and regulators. This paper departs from prior studies by constructing a comprehensive analytical framework that controls for twelve macroeconomic and financial variables, namely GDP growth rate, inflation rate, interest rate, exchange rate, market volatility, global risk appetite (VIX), foreign portfolio investment (FPI) flows, political risk, policy uncertainty, monetary policy stance, global oil demand, and world stock market returns. Employing an array of time series econometric techniques, including Ordinary Least Squares (OLS) with Newey-West heteroskedasticity and autocorrelation consistent (HAC) standard errors, Autoregressive Distributed Lag (ARDL) bounds testing, Generalized Autoregressive Conditional Heteroskedasticity-in-Mean (GARCH-M), and Non-linear ARDL (NARDL), the study uncovers several novel findings. First, oil price shocks exert statistically significant and asymmetric effects on Nigerian stock returns: positive oil shocks of moderate magnitude generate positive market responses, while oil price crashes and sharp volatility spikes consistently depress market returns. Second, the exchange rate channel emerges as a dominant transmission mechanism, with Naira depreciation amplifying the adverse effects of negative oil shocks. Third, foreign portfolio investment flows and global risk appetite jointly moderate the responsiveness of Nigerian equities to oil market signals. Fourth, political risk and policy uncertainty constitute significant structural impediments that prevent the Nigerian stock market from efficiently pricing oil market information. These findings carry important implications for portfolio managers, the Central Bank of Nigeria, the Securities and Exchange Commission (SEC), and fiscal authorities, and they contribute to the nascent literature on oil-equity market nexus in frontier markets.