FOREIGN PRIVATE INVESTMENT AND STOCK MARKET VOLATILITY IN NIGERIA
I.O. Osamwonyi,1 A. K. Ikponmwosa,2
1Department of Banking and Finance, Faculty of Management Sciences, University of Benin. Benin City
2Department of Banking and Finance, Faculty of Management Sciences, University of Benin. Benin City
This study investigates the dynamic relationship between Foreign Private Investment (FPRI) and Stock Market volatility in Nigeria, with quarterly time series data from 1985 to 2013. FPRI was decomposed into Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI). Following the stationarity test of the data set, the Granger causality test procedure was employed while GARCH was used to determine the magnitude of impact of foreign capital flows on stock market volatility in Nigeria. The result from the Granger causality (dynamics) analysis reveals a unidirectional relationship with the line of causation running from FPI to stock market volatility. This result is substantiated by the results from the GARCH model estimation and is consistent with the argument by Singh (2009) and Osaze (2011). On the other hand, FDI was found to have a feedback relationship with stock market volatility in Nigeria. The GARCH result reveals that FDI tends to help promote stability in the capital market. The volatility running from stock market to FDI is intuitively plausible because ample room for profitable investment opportunities in the Nigerian emerging market. Given the evidence of simultaneity among the variables, the study recommends the need for further investigation on the impulse-response functions among these variables, within the VAR/VECM framework. Recommendations include the need for sound reserve management practices to engender market resilience during shocks, and repositioning the financial market as a pivot for domestic investment growth.
Keywords: Foreign Portfolio Investment, Foreign Direct Investment, GARCH.
JEL Classification: C32, F21, G12.