EXCHANGE RATE VOLATILITY AND FOREIGN PORTFOLIO INVESTMENT: SECTORIAL EVIDENCE FROM NIGERIA

This paper examines the dynamic relationship between foreign portfolio investment and exchange rate
volatility in Nigeria between 1990 and 2024, a time frame characterised by different capital flow patterns
and exchange rate regimes. The study used nominal exchange rate, real exchange rate, exchange rate
regime, and exchange rate misalignment as important variables to capture the subtleties of exchange rate
volatility; net inflow of portfolio investment was used as a stand-in for foreign portfolio investment. The
study verified data stationarity and looked at both short- and long-term associations using the AutoRegressive Distributed Lag (ARDL) model and the Augmented Dickey-Fuller unit root test. The World Bank's
World Development Indicators (WDI) and the Central Bank of Nigeria's (CBN) Statistical Bulletin were the
sources of the data. A long-term relationship between exchange rate volatility and foreign portfolio
investment was validated by the boundaries test. In particular, portfolio inflows were positively and
significantly impacted by both nominal and real exchange rates in the near term, indicating that foreign
investors are sensitive to changes in exchange rates. On the other hand, the exchange rate regime had a
long-term negative and substantial impact on portfolio inflows, underscoring policy unpredictability as a
barrier to consistent investment. It's interesting to note that over time, exchange rate misalignment showed
a strong and positive correlation with inflows, suggesting that investors were speculating on currency
mispricing. In order to boost investor confidence and draw in capital inflows, the study finds that exchange
rate dynamics are crucial in determining foreign portfolio investment patterns in Nigeria and advises the CBN
to maintain stable and market-reflective exchange rate policies.