STOCK MARKET RESPONSE TO INVESTMENT IN CRYPTOCURRENCY IN NIGERIA: EVIDENCE FROM DYNAMIC NARDL SIMULATION

Abstract

This paper examines how the Nigerian stock market has reacted to the cryptocurrency investment with specific reference to the asymmetric effects of the Bitcoin price shocks through a Dynamic Nonlinear Autoregressive Distributed Lag (NARDL) model. Driven by the increasing adoption of digital assets into global financial systems and lack of evidence specific to Nigeria, the study fills major gaps in the literature with regards to nonlinear dynamics, asymmetric transmission, and country-specific analysis. The monthly data used include January 2019 to June 2022 and include the macroeconomic control variables in exchange rate, inflation rate, monetary policy rate, and treasury bill rate. The NARDL bounds test is used to confirm the fact that there is a long-run relationship between the variables. The findings indicate that both positive and negative Bitcoin price shocks have negative long-run effects on the Nigerian stock market, where negative shocks have a greater economic impact, indicating downside risk transmission. In spite of the fact that the Wald test fails to affirm the existence of statistical asymmetry, dynamic multiplier analysis indicates that persistent directional asymmetry exists, where there are stronger responses to negative shocks. On a short-term basis, the fluctuations of the exchange rates come up as the most important determinant of the stock market performance, whereas Bitcoin shocks emerge as insignificant. The error correction mechanism shows that there is quite a fast adjustment to long-run equilibrium. The paper finds that investment in cryptocurrencies has a growing yet multidimensional presence in the financial system of Nigeria, creating opportunities of diversification as well as risks of market instability. It is recommended by policy that better regulation should govern the financial market, the exchange rates are to be stable, and the investment policies used should be risk-conscious in order to increase the resilience of the financial market.