Stock Market Volatility and its Impact on Foreign Direct Investments in Nigeria: 2012 - 2024
DOI:
https://doi.org/10.68050/JAMS.2026.396Keywords:
Exchange Rate, Foreign Direct Investment, Inflation Rate, Nigerian Exchange Group, Stock Market Volatility.Abstract
The paper examined stock market volatility and its impact on Foreign Direct Investment (FDI) inflows in Nigeria using annual time-series data covering the period from 2012 to 2024. To isolate the distinct effect of equity market risk, the research framework integrated key macroeconomic control variables, including the official exchange rate, inflation rate, and benchmark interest rate. Using daily log-returns of the Nigerian Exchange Group (NGX) All-Share Index, stock market volatility was operationalized via a Generalized Autoregressive Conditional Heteroskedasticity GARCH (1,1) model. The GARCH output revealed a high volatility persistence parameter (α1 + β1 = 0.95390), confirming strong volatility clustering within the Nigerian capital market. Unit root testing via the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests indicated that stock market volatility is stationary at levels [I(0)]. Whereas FDI, exchange rate, inflation rate, and interest rate become stationary after their first differences [I(1)]. The linear regression estimates showed that stock market volatility exerts a negative and statistically significant impact on Foreign Direct Investment inflows (β= -12,415.80, p = 0.0120). Regarding the control variables, the exchange rate (β = -1.98, p = 0.0148) and inflation rate (β = -42.15, p = 0.0494$) exhibited significant negative effects on FDI, while the benchmark interest rate showed a positive and significant relationship (β = 115.40, p = 0.0433). Diagnostic tests confirmed model stability, homoskedasticity, and the absence of serial correlation (R2 = 0.764, F = 6.474, p = 0.0127). The paper concludes that; capital market instability and broader macroeconomic uncertainties act as major deterrents to long-term foreign capital commitment in Nigeria. It is recommended that financial regulators implement volatility-smoothing mechanisms on the NGX, harmonize exchange rate regimes to enhance liquidity, and combine monetary tightening with targeted fiscal incentives to stabilize the host investment climate.
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