European Scientific Journal September 2013 edition vol.9, No.25 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431 261 STOCK PRICES AND EXCHANGE RATE VARIABILITY IN NIGERIA ECONOMETRIC ANALYSIS OF THE EVIDENCE David Umoru, PhD Mike O. Asekome Department of Economics, Banking & Finance, Faculty of Social & Management Sciences, Benson Idahosa University, Benin City, Nigeria Abstract This study examines the dynamic interaction between stock prices and the Naira-US$ exchange rate in Nigeria using co-integration and the Granger-Sim causality methodology. The results portray the fact that whenever there is a change in the Naira-US$ exchange rate, stock prices react in tandem. The empirical analysis thus provides evidence of a positive co-integrating relationship between the Naira-US$ exchange rate movement and the Nigerian stock market prices with bi-directional Granger causality found to exist between stock prices and exchange rate in Nigeria during the period researched. The results accordingly lend empirical support to the fact that the Naira-US$ exchange rate movement and the Nigerian stock exchange market interacted in a manner that is simultaneously consistent with the predictions of the flow and stock theories. Keywords: Naira-US$ exchange rate, Stock prices, Granger-Sim causality, Flow model, Stock model Background Nigeria’s exchange and trade system have been liberalized extensively since 1980’s. Indeed, the country adopted a flexible exchange rate system in adherence to the Bretton Woods Agreement. A flexible exchange rate system is one with which the exchange rate at any time is determined by the interaction of the market forces of demand and supply for foreign exchange. We could have a clean float, that is, no government intervention or dirty float which allows government intervention. Proponents of the flexible exchange rate regime argued that it permits a continuous response to changes in the fundamentals of the economy, neutral with respect to inflation, causes higher growth and leads to BOP equilibrium without inducing demand restraints and protectionism that may cause further