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An analysis of causal nexus between foreign direct investment, exchange rate and financial market development in Nigeria (1970 to 2009)

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The study investigated the causal relationship between FDI, exchange rate and financial market development using quarterly data from Nigeria. This was with a view to determine whether there existed any significant causal nexus was from FDI exchange rate to financial market development or the other way round in Nigeria. The study adopted vector error correction mechanism. Exchange rate was included with a view to determining whether macroeconomic instability adversely affected financial market development in Nigeria. The results show that FDI had no significant causal effect on financial market development while there are bidirectional causality between financial market development and exchange rate. In addition, a further analysis of effects of FDI and exchange rate on financial market development showed that both FDI and exchange rate had negative effects on financial market development; thus implying that FDI and macroeconomic instability adversely affect the development and provision of financial services in Nigeria.

Keywords: financial market development, FDI, foreign direct investment, exchange rates, VEC, vector error correction, causality, Nigeria, financial markets, macroeconomic instability, financial services

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