CBN Journal of Applied Statistics (JAS)


Exchange rate, interest rate, multivariate GARCH, volatility spill over


This study examines the money market and foreign exchange market dynamics in Nigeria by estimating the dynamic correlation and volatility spillovers between the Nigeria Naira/US Dollar Bureau De Change (BDC) exchange rate and interbank call rate with data from January 2007 to August 2019. The study employs a dynamic conditional correlation form of the GARCH model (DCC-GARCH) to assess the nature of correlation, while an unrestricted bivariate BEKK-GARCH (1, 1) form of the multivariate GARCH model is utilized to investigate shocks and volatility spillover of the rates. The estimated DCC-GARCH (1, 1) reveals that interest rate and exchange rate are dynamically linked negatively, suggesting that exchange rate (or interest rate) is inversely sensitive to interest rate (or exchange rate) in Nigeria. This result was substantiated by the estimated BEKK-GARCH(1, 1) model. Furthermore, the effects of news (shocks spillover) are bi-directional across the markets. However, volatility spillover is unidirectional, from exchange rate to interest rate, suggesting that, calming the volatility in the foreign exchange market does guarantee moderation of volatility in the money market, whereas reverse is not the case. The results underscore the growing influence of the foreign exchange market in the financial space of the Nigerian economy. Thus, the study recommends that foreign exchange policies aimed at maintaining exchange rate stability should be sustained, having found the exchange rate to be more effective in moderating interest rate volatility in Nigeria.

Author Bio

The authors are staff of the Central Bank of Nigeria and Ebonyi State University, Abakiliki.

Publication Title

CBN Journal of Applied Statistics


No. 1


Vol. 12



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