ABSTRACT

Abstract

It has become increasingly important for developing countries to ensure safety of investment and attractive returns for portfolio investors. This kind of investment is relatively liquid, depending on the volatility of the market invested in. However, in order to attract adequate foreign capital needed for investment, capital market development has been identified as one of the critical determinants of foreign portfolio investment therefore this study investigates the impact of capital market development on foreign portfolio investment volatility in Nigeria between 2007M1 and 2018M12. Techniques of analysis employed were Exponential generalized conditional heteroscedasticity (EGARCH) and Autoregressive distributive lag (ARDL) approach. The study revealed that stock market capitalization has no significant impact on foreign portfolio investment volatility in Nigeria. The implication of this result is that information asymmetries that exists within capital market operations, as well as the unpredictability of the activities of the Nigerian capital markets hugely contributes insignificantly to volatilities of foreign portfolio investment. However, it was discovered from the study that all share index has a significant impact on foreign portfolio investment volatility in Nigeria. The Stock market return was also found to have a significant impact on foreign portfolio investment volatility in Nigeria. The significant impact of the capital market development indicators (ASI and SMR) corroborates the fact that capital market development is an important determinant for the inflow of foreign portfolio investment into Nigerian economy. Based on these findings, the study recommends that government and capital market regulatory authorities need to develop and implement proper policies that will propel better performance of the capital market through stock market capitalization as it impacts the volatility of foreign portfolio investment in the Nigerian economy. There is also the need for capital market regulatory authorities to implement effective and efficient policies that ensures free flow of market information related to all share index and stock market value that exists within the floor of the capital market to prevent information asymmetries which could create volatility clustering in foreign portfolio investment in the country.

                Keywords: Capital Market Development; Stock Market Capitalisation; All Share Index; Stock Market Value; Foreign Portfolio Investment Volatility.