FOREIGN PORTFOLIO INVESTMENT VOLATILITY AND ECONOMIC GROWTH IN NIGERIA: EVIDENCE FROM TIME-SERIES DATA

This study examined the relationship between foreign portfolio investment
volatility and economic growth in Nigeria using annual time-series data
covering the period 1987–2024. The study specifically investigated the
interactions among real gross domestic product (RGDP), foreign portfolio
investment (FPI), market capitalisation (MCAP), interest rate (INT), and
exchange rate (EXR). The study employed a Vector Autoregressive (VAR)
framework, alongside and variance decomposition to examine the dynamic
relationships among the variables. The VAR results indicated a stable long-run
relationship among the variables, with a negative and statistically significant
error-correction term suggesting adjustment towards long-run equilibrium. The
results also showed that market capitalisation had a positive and significant
long-run relationship with economic growth, while its short-run effect was
insignificant. Interest rate and exchange rate exhibited insignificant short-run
relationships with RGDP but significant long-run relationships. The variance
decomposition results revealed that interest rate shocks accounted for a
substantial proportion of RGDP forecast error variance by the tenth period,
while FPI and market capitalisation contributed relatively small shares. Market
capitalisation and economic growth explained increasing proportions of FPI and
market capitalisation fluctuations, respectively. Furthermore, FPI became an
important contributor to interest rate fluctuations, while RGDP and interest rate
accounted for notable proportions of exchange rate forecast error variance. The
study concludes that foreign portfolio investment alone is insufficient to drive
sustainable economic growth in Nigeria. Macroeconomic stability, effective
monetary policy, exchange rate stability, and capital market development are
essential for strengthening the contribution of portfolio investment to economic
performance. The study recommends policies that deepen the capital market,
improve investor confidence, minimise destabilising macroeconomic
fluctuations, and encourage portfolio inflows to complement domestic
productive investment.