Project MUSE - Stock Market Development and Economic Growth in Nigeria: Evidence from Vector Error Correction Model (2024)

Abstract

ABSTRACT:

Considerable debate exists on how stock exchanges affect economic growth. One line of research argues that stock (equity) market development is a positive and significant contributor to growth. On the other hand, other studies show that stock markets negatively affect growth or that they are not relevant contributors to economic growth. This paper seeks to identify the long-run impact of stock market development on the economic growth of Nigeria. The data is sourced from the statistical bulletin of the Central Bank of Nigeria (CBN) from 1981 to 2017. The Augmented Dickey-Fuller unit root test shows that all the variables are integrated of order 1, I(1). However, the Johansen cointegration test provides evidence of a long-run, or equilibrium, relationship among the variables. The vector error correction model is used to determine the short-run and long-run relationships between the variables. Empirical results suggest that stock market development, as proxied by market capitalization to GDP ratio, does not contribute significantly to long-run economic growth in Nigeria. This finding implies that the Nigerian economy has not gotten to the development stage where the stock market can play critical economic development roles and the institutions that ensure the proper functioning of stock markets are non-existent. I recommend that efforts must be made to grow and diversify the Nigerian economy because higher national income stimulates the demand and supply of equity market services and facilities from both individuals and firms, and ultimately promotes a more developed equity market that can further accelerate growth. In addition, robust institutions that protect investor rights and guarantee transparency in the market must be established to build confidence in the equity market and to encourage domestic and foreign participation in the stock market. These conditions are critical if the country wants to benefit from its stock exchange.

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