Exchange rate volatility, stock market dynamics and foreign direct investment in Nigeria (2002–2023)

Purpose - The study tests the interactive and causal relationship among exchange rate volatility (ERV), foreign direct investment (FDI), and stock market performance (SMP) in Nigeria from 2003–2022. Specifically, it investigates the long-run effect of ERV on SMP as well as the interactive effect of ERV and SMP on FDI. Methodology - The research follows an explanatory time series design and relies on secondary data gathered from the World Bank database. Econometric techniques, including the Autoregressive Distributed Lag (ARDL) model, Granger causality tests, and multiple regression analysis, are employed to examine both short- and long-run relationships among the variables. Results - The long-run ARDL specification and bounds test reveal the presence of a large inverse relationship between lagged and current FDI, which indicates an adjustment process towards equilibrium. Exchange rates have a positive and significant effect on long-run FDI, but the dynamics of short-run exchange rate movements and stock market performance are not significant. More volatility of exchange rates is also associated with low FDI, which reflects the adverse effect of exchange rate uncertainty on foreign investment. Conclusion - The evidence supports the supreme role played by exchange rate dynamics in determining FDI inflows. The long-run negative impact of exchange rate volatility on FDI supports the need for policy measures to ensure exchange rate stability for a more conducive investment climate in Nigeria. Keywords: Exchange rate volatility, stock market performance, foreign direct investment, ARDL model.