Foreign Exchange Management Regime and Stock Market Capitalisation in Nigeria

Abstract

Exchange rate continue to be a significant macroeconomic factors in any economy. The exchange rate has consistently become more volatile despite multiple attempts to stabilise the Naira's value, mostly through monetary policy tools. Therefore, the study examined the effect of foreign exchange management regimes on stock market capitalization (SMC) in Nigeria from 1986 to 2022. An ex-post factor research design was adopted while the estimation techniques for the study was Autoregressive Distributed Lag (ARDL).  Findings revealed that during the floating exchange rate period, exchange rate, balance of payments, external reserves, and inflation rate have negative effect on stock market capitalization, though insignificantly. However, foreign direct investment (FDI) and foreign portfolio investment (FPI) positively and significantly influence market capitalization. Conversely, under the fixed exchange rate regime, exchange rate, balance of payments, external reserves, and inflation have negative effect on market activity. This study concluded that under floating exchange rate regime, FDI continue to be a catalyst to stock market capitalisation.  The study recommends targeted policies to attract foreign investments, including incentives and infrastructure improvements, along with a continuous evaluation of foreign exchange policies to support a stable, growth-oriented stock market environment.