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This paper investigates the time varying correlation of stock returns relative to exchange rate and inflation rate and their volatilities in Nigeria.The data sets on monthly All Shares Index prices of the NSE market, monthly official exchange rate of naira per unit of one US dollar and consumer price index cover the period of 1985M1-2010M12. The Diagonal BEKK (1, 1) model was adopted to capture time varying correlation and regression model was used to test the significant of time trend and global financial crises on the correlations. The results reveal that the correlation of stock market returns relative to exchange rate and inflation rate seems to be constant over time while the correlation of stock returns volatility relative to volatility of exchange rate and inflation vary over time and the trends exhibit a downward slope. This implies that the magnitude of their interdependence have decreased over time. The global financial crises have significant negative effect on the correlation between stock returns and exchange rate and between stock returns volatility and inflation volatility. This implies that external shocks are likely to reduce the degree of interdependence between stock returns and exchange rate and between stock returns volatility and inflation volatility.

Time Varying Correlation of Stock Returns Relative to Exchange Rate and Inflation Rate and also Their Volatilities: Evidencefrom Nigeria