Macroeconomic Uncertainty and Foreign Portfolio Investment Volatility: Evidence from Nigeria

Abstract

This paper examined the effect of information asymmetries on macroeconomic volatility and FPI volatility in Nigeria using the AR(k)-EGARCH(p,q) model, and the nexus between macroeconomic uncertainty and FPI volatility in Nigeria using the LA-VAR Granger Causality test. Quarterly time series data were drawn from the Central Bank of Nigeria Statistical Bulletin, 2011 spanning through 1986Q1 to 2011Q4. The study found that all the included variables were highly volatile and responded asymmetrically to information shocks. The results also predict that a stable macroeconomic environment is necessary for steady FPI inflow and steady FPI inflow is also needed for some levels of macroeconomic stability. It was therefore recommended that insiders’ activities in the Nigerian capital market be properly monitored and that policy makers should be sensitive to possible policy tradeoffs when the need arises between higher economic growth and rising price levels, and sustained economic growth and stable prices.

Keywords: Macroeconomic uncertainty, FPI Volatility, AR-EGARCH Model, and LA-VAR Model.