FOREIGN EXCHANGE MARKET LIQUIDITY DETERMINANTS IN DEVELOPING ECONOMIES: EVIDENCE FROM NIGERIA

HILARY, Uchenna Onyendi
Department of Banking and Finance
Michael Okpara University of Agriculture
Umudike, Umuahia Abia State
E-mail hilluch2008@yahoo.com
OSUJI, John I.
Department of Banking and Finance.
Michael Okpara University of Agriculture Umudike
osujijohnibeawuchi@gmail.com
ONUEGBU, Onyekachi
Department of Banking and Finance.
Michael Okpara University of Agriculture Umudike
onyekachi2018@gmail.com
OKORO, Kelechi Okors
Department of Banking and Finance.
Michael Okpara University of Agriculture Umudike.
okorokelechi4@gmail.com
ABSTRACT
This study studied factors that determine foreign exchange market liquidity in Nigeria from 1970 to 2022.
The study adopted ex post facto design. The secondary data was sourced from Central Bank of Nigeria
CBN statistical bulletin of various issues. The econometric tools used in the study include the Augmented
Dickey Fuller test to test for unit root, the Auto regressive Distributive Lag ARDL to test for co -integration
among the variables and the Granger causality test. Results established that balance of payments (BOP),
balance of trade (BOT), foreign exchange demand, foreign exchange supply, gross domestic product, and
money supply are the determinants of foreign exchange liquidity in Nigeria while inflation and lending rate
are not. This implies that if the high inflationary and lending rates in the country are not checked
immediately, FEM illiquidity will be triggered and this will adversely affect the exchange rate of the
domestic currency against other trading partners. The recommendations are that government should review
policies to check the soaring rate of inflation; and also allow the forces of demand and supply to determine
the lending rate as contrasted to indirect interference by way of fixing the rate.
Keywords: Commonality market, foreign exchange market, foreign exchange market liquidity