EFFECT OF FOREIGN PORTFOLIO INVESTMENT ON PRICE VOLATILITY IN THE NIGERIAN STOCK MARKET

ABSTRACT

The study evaluates the effect of foreign portfolio investment on stock price volatility in the Nigerian stock market from 1981 to 2021. The objective of the study was to evaluate the impact of foreign portfolio investment on stock price volatility in the Nigerian stock market. Generalized Autoregressive Conditional Heteroscedasticity (GARCH) was employed to examine the relationship between foreign portfolio investment and stock price volatility. The study found that the level of foreign portfolio investment has a positive and significant impact on stock price volatility in the Nigerian stock market and exchange rate has a positive and significant impact on stock price volatility in the Nigerian stock market. Interest rate was also found to have a positive and significant impact on stock price volatility in the Nigerian stock market while the rate of inflation was also found to have a positive but insignificant impact on stock price volatility in the Nigerian stock market. The study also shows that the ARCH and GARCH parameters both met the non-negativity requirement and are significant at a 5% level of significance. The difference between the GARCH parameter and the ARCH term shows that the stock price volatility is more sensitive to its own lagged values than to its present period values. As a result, the impact of the projected deviation from the prior period is more enduring. Additionally, GARCH and ARCH parameter summations that are closer to unity show that stock price shocks have strong, longlasting effects and that the response to volatility decays more slowly. The study therefore recommends that policymakers should pay serious attention to the regulation of portfolio investments from foreigners for excess of it would keep increasing the tendencies of stock price volatility in the Nigerian stock market. Also, the federal government should also pursue the reduction of naira against external currencies to stabilize the behavior of stock market price through exchange rate control policies.