EXCHANGE RATE VOLATILITY AND FOREIGN PORTFOLIO INVESTMENT IN NIGERIA

ABSTRACT

The study investigated the relationship between exchange rate volatility and foreign portfolio investment in Nigeria for a period of thirty (30) years (1993 to 2023). The cointegration and the error correction model (ECM), as well as the EGARCH model were employed in the empirical analysis of the data. The EGARCH was specifically used to generate volatility in the study, while the error correction model (ECM) and cointegration were used for the short run and long run estimation of the purported relationship between exchange rate volatility and other related factors and foreign portfolio investment inflows in Nigeria. The results obtained from the empirical analysis indicate that exchange rate volatility has a weak inverse effect on the inflow of foreign portfolio investment (FPI) in Nigeria both in the short run and in the long run. Exchange rate has weak effect on foreign portfolio investment in the short run but a strong positive effect in the long run. RGDP has an insignificant inverse effect on FPI in the short run as well as in the long run, hence, it does not play significant negative effect on FPI inflow in the short run and in the long run; market liquidity though significantly signed but failed the 5 percent significant level both in the short run and in the long run. Financial openness is a strong factor for determining FPI inflows in Nigeria, as it was positive and significantly impact FPI inflows in Nigeria in the short run and long run. The study recommends among others that, since the role of exchange rate volatility in foreign portfolio investment indicates weak negative effect, it is appropriate for authorities to develop sound exchange rate management in the country. The Central Bank should use the allocations and disbursement of foreign currencies as well as the naira to regulate the vacillations in exchange rate over time.