AN EVALUATION OF RETAIL AND WHOLESALE DUTCH AUCTION SYSTEMS OF FOREIGN EXCHANGE RATE IN NIGERIA (2002-2010).
AN EVALUATION OF RETAIL AND WHOLESALE DUTCH AUCTION SYSTEMS OF FOREIGN EXCHANGE RATE IN NIGERIA (2002-2010).
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Date
2012-10
Authors
MUSA, ALIYU
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Abstract
The study evaluated Retail Dutch Auction System (RDAS) and Wholesale Dutch
Auction System (WDAS) of foreign exchange rate in Nigeria with a view to make
comparative analysis between the two phases in terms of volatility of demand,
supply and marginal rate, presence or absence of collusive behavior and exchange
rate spreads. The study used bi-weekly Dutch Auction results of 824 sessions
(comprising of 342 retail sessions and 482 wholesale sessions) between 2002-
2010. The GARCH model and descriptive statistics were used to investigate the
volatility of demand, supply and marginal rate. Also, descriptive statistics were
used to analyze presence of collusive behaviour and exchange rate spreads. The
study concluded that although marginal rate, demand and supply remained volatile
under both retail and wholesale phase of the auction, they were more volatile under
wholesale phase than retail phase of the auction. Also, higher excess demand and
higher chance for collusive behaviour among bidders of foreign exchange were
more prevalent in the wholesale phase than retail phase of the auction. The trend
analysis showed that the introduction of Wholesale Dutch Auction System had led
to a sustained convergence of the BDC, IFEM and WDAS rates even though it
could not curtail the depreciation of the Naira. The following recommendations
were made; firstly, the government should reduce excess demand by embarking on
an import substitution strategy that will stimulate the domestic production base of
the economy thereby reducing foreign exchange excess demand gap. Secondly,
CBN foreign exchange policy shift should be followed-up by timely systematic
analysis of its efficacy in yielding results so as to avoid frequent policy reversals.
Thirdly, in the long term, the Dutch Auction System should be suspended because
despite the modifications it had witnessed overtime, it had failed to stabilize the
Naira during both retail and wholesale auction. Fourthly, the CBN should create a
more market determined template for foreign exchange determination by devolving
more of its monopoly power of foreign exchange supply so that excess demand gap
can be narrowed. Finally, further studies should focus on investigating the
effectiveness of the recently introduced foreign exchange rate forwards with the
aim of evaluating its impact on the stability of the exchange rate.
Description
A thesis submitted to School of Postgraduate Studies Ahmadu Bello University, Zaria
In partial fulfillment of the requirements for the award of
Masters Degree of Science in Economics.
Department of Economics
Faculty of Social Science
Ahmadu Bello University, Zaria.
OCTOBER, 2012.
Keywords
EVALUATION,, RETAIL,, WHOLESALE,, DUTCH AUCTION SYSTEMS,, FOREIGN EXCHANGE RATE,, NIGERIA (2002-2010).