Determinants of Foreign Portfolio Investment Flows into the Nigerian Capital Market: An Empirical Analysis

Foreign portfolio investment flows are a significant source of capital for emerging market economies, yet the determinants of these flows into the Nigerian capital market remain incompletely understood, representing a gap with important policy implications. This study empirically analyses the determinants of foreign portfolio investment flows into the Nigerian capital market for the period 2005 to 2022 using quarterly time-series data from the Central Bank of Nigeria, the Nigerian Exchange Group, and international financial databases. Foreign portfolio investment was measured by quarterly net foreign portfolio investment flows. Potential determinants examined include domestic equity market returns, interest rate differential, exchange rate stability, global risk appetite (measured by the VIX index), oil price, GDP growth, and institutional quality. The autoregressive distributed lag bounds testing approach and Granger causality analysis were employed. Results showed that interest rate differential (coefficient = 0.43, p < 0.01), domestic equity market returns (coefficient = 0.38, p < 0.05), and exchange rate stability (coefficient = -0.52, p < 0.01) were the strongest determinants of foreign portfolio investment flows. Global risk appetite (VIX) had a significant negative effect, particularly during the 2020 COVID-19 shock. Oil price positively predicted flows with a three-quarter lag. The study concludes that exchange rate instability is the most significant deterrent to sustained foreign portfolio investment in Nigerian capital markets and recommends a more transparent and predictable exchange rate management framework. Keywords: foreign portfolio investment, capital market, determinants, exchange rate, Nigeria