Foreign Capital Inflows and Stock Market Performance in Selected African Countries

ABSTRACT

The objective of this study is to determine the relationship between foreign capital inflows and stock market performance in selected African countries. The study used annual time series data from four African countries for the period 1990 to 2018. The Autoregressive distributed lag (ARDL) approach to cointegration relationship modeling was used in the empirical analysis. The findings of the study revealed that FDI and FPI have significant positive relationship with market capitalization rate among the countries in Africa. FDI and FPI have an insignificant relationship with stock market volatility in African countries. FPI has significant negative relationship with bond market while FDI has a significant positive impact on the bonds market development among African countries. The study recommends that countries should devise effective policies and standards to effectively obtain more foreign capital into the market. Inflows of foreign should be strongly based on internal developments or factors within the stock market such as high liquidity or structural depth of the market and not on investor-determined factors that are usually extraneous to the characteristics of the capital market. Also, appropriate portfolio management policies need to be put in place within the stock market, especially as it relates to currency composition, choice of investment instruments, and acceptable duration of reserves. Finally, in as much as the study focuses on the role of foreign capital inflows in the stock market, domestic development of the market is critical for long run sustainability. Authorities need to recognize this aspect of the market and focus on improving market fundamentals and strengthen domestic regulations.