article · CECCAR BUSINESS REVIEW
Economic policy uncertainty significantly alters how foreign capital influences capital market growth in Nigeria. An analysis of quarterly data spanning 2010 to 2023 assesses how policy unpredictability influences foreign direct investment and foreign portfolio investment, and subsequently affects market performance. The findings indicate that foreign portfolio investment reliably fosters capital market expansion. However, sustained periods of economic policy uncertainty weaken this beneficial effect, particularly over the long term. Conversely, foreign direct investment demonstrates limited influence on capital market growth across the periods evaluated. Grounded in Real Option Theory, these insights illustrate how uncertainty shapes investment behaviour and market outcomes. Maintaining predictable policy environments is therefore vital for emerging economies seeking to sustain foreign portfolio inflows and ensure financial market stability.
Financial markets require predictability to attract and retain international capital. When economic policies remain volatile or unclear for prolonged periods, the beneficial contributions of foreign portfolio investment to market growth diminish. Understanding these transmission channels helps regulators and policymakers in emerging economies design stable policy frameworks that safeguard financial market performance and maintain investor confidence.
The abstract describes macroeconomic research rather than a commercial product or technical invention. Its practical relevance lies in guiding policy formulation and market regulation by central banks, finance ministries, and securities regulators. Because the work is focused on economic modelling and governance implications, the abstract does not indicate an application pathway for commercial product development.
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This study investigates the impact of economic policy uncertainty (EPU) on capital market growth in Nigeria, emphasizing the mediating role of foreign investment. While prior research has treated EPU, foreign investment, and capital market dynamics separately, this paper contributes a novel perspective by analysing the transmission mechanism through which policy uncertainty affects foreign direct and portfolio investments and, in turn, capital market performance. Utilizing quarterly data from 2010 to 2023 and applying the Autoregressive Distributed Lag (ARDL) approach, the study incorporates interaction terms to assess short- and long-term effects. Findings reveal that while foreign portfolio investment (FPI) consistently supports capital market growth, prolonged EPU undermines its impact, especially over time. Foreign direct investment (FDI), however, shows limited influence across periods. The originality of this research lies in its integration of Real Option Theory to explain investment behaviour under uncertainty, offering significant implications for economic policy formulation and market regulation in emerging economies.
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DOI: 10.37945/cbr.2025.07.06
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