IMPACT OF EXCHANGE RATE VOLATILITY ON FOREIGN PORTFOLIO INVESTMENT IN NIGERIA

This study investigated the impact of exchange rate volatility on foreign portfolio investment (FPI) in Nigeria, using data from 1986 to 2023. The research employs a multivariate econometric approach, specifically the Autoregressive Distributed Lag (ARDL) to examine short- and long-term dynamics and the Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model to measure exchange rate volatility. The main finding reveals that exchange rate volatility significantly influences foreign portfolio investment over time, transitioning from a negative and insignificant impact in the short term to a positive and significant effect in the long-term suggesting that investors leverage past volatility to adjust their strategies and seize speculative opportunities. The study also identifies a cyclical pattern in FPI, where periods of high inflows are followed by reductions, indicating that investors often scale back their investments after a surge, likely due to concerns about overvaluation or market corrections. The research further delved into the influence of some macroeconomic variables on FPI, such as foreign exchange reserves, interest rates, inflation rates, and GDP. Foreign exchange reserves and interest rates were found to have negligible effects on FPI, suggesting that broader economic factors beyond reserves and short-term interest rates influenced FPI during the review period. Inflation on the other hand has a marginally negative effect, confirming that higher inflation deters investment due to concerns about diminished returns. The relationship between GDP and FPI is multifaceted: current GDP levels negatively impact FPI, possibly due to market saturation, while previous GDP growth positively influences FPI, implying that investors view past economic performance as an indicator of future stability and profitability. Recommendations for policymakers include enhancing transparency in exchange rate interventions, expanding access to currency hedging tools, developing financial products linked to volatility, and improving market efficiency.