Abstract: This study investigates the dynamic relationship between Foreign Private Investment (FPRI) and Stock Market volatility in Nigeria, using quarterly time series data from 1985 to 2013. FPRI was decomposed into Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI). After the preliminary stationarity test of the data series, the Granger causality test procedure was employed, and finally a GARCH process was used to determine the magnitude of impact of foreign capital flows on stock market volatility in Nigeria. The result from the Granger causality (dynamics) analysis reveals a unidirectional relationship running from FPI to stock market volatility, while FDI is found to have a feedback relationship with stock market volatility in Nigeria. The GARCH result reveals that FPI contributes to stock market volatility, while FDI helps to promote stability in the capital market. Against the backdrop of these findings, it is recommended that policy measures to stimulate and stabilize foreign private investment, particularly FPI be put in place in order to ensure the stability and growth of the stock market. Importantly, sound institutional and regulatory mechanisms, as well as stable macroeconomic policy environment are imperative to engendering market resilience during shocks, and the repositioning of the financial market as a pivot for domestic investment and rapid economic growth.
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