Page 127 - Contributed Paper Session (CPS) - Volume 5

CPS1144 Adeniji Nike Abosede et al.

Forecast Error Variance Analysis on the impact of
foreign exchange rate volatility on Nigeria
export growth
1
1,2
Adeniji Nike Abosede ; Onasanya, Olanrewaju. K
1 National Population Commission, Nigeria
2 West Africa Young Statisticians Association, Nigeria

Abstract
This paper focus on forecast error variance analysis on the impact of foreign
exchange volatility on Nigeria export growth using annually time series data
for the period 1980 – 2017. The export is segregated into non – oil, total and
oil export. Under the constant term assumption provided by the data
generating mechanism of each variable (non – oil, oil, total export, and
naira/dollar exchange rate) each were I (1) which was established from
Augmented Dickey Fuller (ADF) test. Positive relationships were examined at
both aggregate and disaggregate level of export based on the result provided
by unrestricted vector auto-regression (dynamic model). The error derived
from the VAR model explained all the forecast error variance of non – oil, oil
and total export at all forecast time horizon indicating that non – oil, oil, and
total export can be treated as endogenous variables. With this view,
naira/dollar exchange rate had slight effect on export at both aggregate and
disaggregates level. The policy recommendation for this is to put a proper
mechanism in place either through the use of devaluation or currency
restructuring which will aid business attribute and investors to have efficient
productivity on Nigeria export growth.

Keywords
Forecast error variance decomposition; Total Export, Exchange rate volatility;
Unrestricted Vector Auto regression; Oil Export; Non-oil Export

1. Introduction
The term volatility means the relative rate at which the price of a security
moves up and down. This volatility; is found or measured by its analysed
standard deviation of daily change in price. If the price of a stock moves up
and down rapidly over the short time period, it has high volatility. If the prices
almost never change, it has low volatility. Exchange rate in terms of finance
means the exchange rates between two currencies specifies how much one
currency is worth in terms of the other. It is the value of a foreign nation’s
currency in terms of the home nation’s currency. Exchange rate volatility is
described to be the relative rate at which the value of a foreign nation’s
currency in terms of the home nation’s currency moves up and down. This
foreign exchange rate volatility thus has a great effect on once nation

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