Oil Prices and Exchange Rate Dynamics: How Important Is the Role of Asymmetry and Structural Breaks?

In this paper, we model the relationship between oil price and exchange rate for Nigeria using monthly data from January 1997 to December 2019. The contributions of this paper are twofold: (i) we employ both the Symmetric ARDL and Asymmetric ARDL, and (ii) we also account for multiple structural changes in regression models. The following findings are apparent from our analyses. First, an increase in oil prices leads to depreciation of the Naira relative to the US dollar. Second, oil price asymmetries seem to matter both in the short run and in the long run. Third, the findings indicate evidence of structural breaks in the oil and exchange rate markets which coincides with the 2000 US invasion of Iraq, 2005 Asian demand soars, 2008 global financial crisis and 2015 Arab springs. Finally, we establish that disregarding the role of structural breaks and asymmetry will lead to serious biases and misleading results.