Evaluating the Effect of Exchange Rate Unification on Exchange Rate Volatility in Emerging Markets: A Case Study of Nigeria

This study addresses a critical gap in the literature by examining the im-pact of Nigeria’s 2023 exchange rate unification on its exchange rate volatil-ity. The recent unification has introduced unprecedented challenges and com-plexities that have not been thoroughly investigated in existing research. These uncharted dynamics pose significant risks for economic stability, as they con-tribute to heightened market uncertainty and volatility. The lack of detailed analysis on these effects underscores the need for deeper exploration, partic-ularly in terms of how such policy shifts can disrupt financial markets and investor confidence. Understanding these implications is vital not only for Nigeria but also for other emerging economies, as it can inform the develop-ment of effective strategies to mitigate risks, facilitate smoother transitions, and promote long-term stability across similar contexts. The study adopts a dual-method approach, blending volatility modeling with an event study framework. It utilizes daily exchange rate data for the Nigerian Naira (NGN) against the US Dollar (USD) from January 1, 2020, to August 2, 2024. The analysis reveals significant and prolonged spikes in abnormal volatility sur-rounding the announcement, reflecting heightened market uncertainty in the face of these transformative changes. Specifically, the EGARCH model shows that volatility increases substantially during the post-event window, with a notable asymmetry where negative shocks have a larger impact on volatil-ity than positive ones. Cumulative abnormal volatility consistently rises over time, suggesting that the market’s adjustment to the unification is not imme-diate but accumulates over an extended period. The findings underscore the urgent need for well-crafted policies tailored to emerging market contexts, in-cluding clear communication, supportive fiscal and monetary strategies, and continuous monitoring of market conditions. Such measures are essential for managing the transition effectively and ensuring long-term economic stabil-ity.