AN EVALUATION OF THE RE-INTRODUCED DUTCH AUCTION SYSTEM AS A MEANS OF DETERMINING A REALISTIC AND STABLE VALUE OF THE NAIRA

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AN EVALUATION OF THE RE-INTRODUCED DUTCH AUCTION SYSTEM AS A MEANS OF DETERMINING A REALISTIC AND STABLE VALUE OF THE NAIRA

Abstract:

In 2002, the Central Bank Nigeria (CBN) re-introduced the Dutch Auction System (DAS) which was earlier introduced in 1987 and 1990 in Nigeria to eliminate distortions, speculation, opportunism and sharp practices. It appears that between 1986 and 2002 in spite of the various exchange rate management systems, the goals of efficient and stable exchange rate were elusive. This study uses data on 354 DAS sessions to evaluate the effects of the DAS in generating efficiency and stability of the values of the Naira. Trend Analysis and ADF tests were used to evaluate stochastic properties of the DAS series. Foreign exchange spreads were estimated and their trend evaluated to determine effects on efficiency. GARCH models of Demand and Marginal Price were estimated to analyze stability. The study found that the DAS series exhibited different patterns of volatility, while the DAS spread declined, the parallel exchange rate premium increased and both demand and marginal rate were volatile. Thus, the DAS seems not to have made the foreign exchange more efficient or stable. Since March, 2006 the Central Bank of Nigeria has replaced the old retail DAS in favor of the wholesale DAS for the achievement of efficiency and stability of the Naira exchange rate. However, while the exchange rate spread has declined, this seems to have been brought about by increase in supply of foreign exchange by the CBN. It is not clear if the seeming convergence in exchange rate is sustainable. The study therefore, recommends further investigation into the recent phase of the DAS, focusing on the problems of sustainability. AUWAL, Umar –ABU,Zaria

AN EVALUATION OF THE RE-INTRODUCED DUTCH AUCTION SYSTEM AS A MEANS OF DETERMINING A REALISTIC AND STABLE VALUE OF THE NAIRA

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