IMPACT OF SELECTED MACROECONOMIC VARIABLES ON CAPITAL MARKET IN NIGERIA

AN ECONOMETRIC ANALYSIS

Abstract

Using annual data from 1990 to 2022, the paper examines the impact of foreign capital flows on capital market growth in Nigeria. It also investigates the causal relationship between the dependent variable, market capitalization which serves as proxy for capital market growth and the independent variables foreign portfolio investment, foreign direct investment, real exchange rate and degree of openness. The ordinary least square regression analysis was employed in the study. The Augmented Dickey-Fuller unit root test reveals that all the variables became stationary after first difference, while the Johansen cointegration test result revealed that a long run relationship exists between the variables. Findings from the regression estimates show that foreign portfolio investment, real exchange rate and degree of openness all have positive and statistically significant impact on Nigeria’s capital market growth in the long run. A 1 percent increase in FPI, EXCR and DOP improves Nigeria’s capital market growth by 0.003, 12 and 5.9 percent respectively. Foreign direct investment has a positive but statistically insignificant impact on Nigeria’s capital market growth in the long run. The granger causality test reveals a unidirectional relationship between all the variables except for FPI and FDI that have a bidirectional relationship. The study thus concludes that foreign capital flows have a long run positive impact on capital market growth in Nigeria. It is recommended among others that trade be further liberalised in order to allow free flow of foreign capital and that expansion of the capital market is necessary to attract more foreign capital.