Autoregressive Distributed Lag (ARDL) Analysis of Foreign Portfolio Investments Determination in Nigeria

Abstract

This study investigates the key macroeconomic variables determining foreign portfolio inflows (FPI) to Nigeria using the autoregressive distributed lag procedure that includes the bounds test of cointegration and error correction mechanism applied against time-series Nigerian data from 1986 through 2019. The results reveal the existence of long-run equilibrium relationship between FPI and exchange rate (EXR), inflation (INF), interest rate (INT), real GDP, and Tax (TXR). Short-run errors are adjusted at a speed of 77.87% per annum, in the long-run. Causality is found to jointly-flow from the explanatory variables to FPI inflows. In all the model estimations - autoregressive, short- and long-runs, exchange rate exerted negative and significant effect on FPIR. Inflation and tax significantly affected FPI inflows to Nigeria. Growth in real GDP and interest rate positively influenced FPIR, but not significantly. The results indicate that the major determinants of FPI inflows are exchange rates, inflation, and tax.