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STOCK MARKET LIQUIDITY AND ECONOMIC GROWTH: EMPIRICAL EVIDENCE FROM NIGERIA

Babatunde Wasiu Adeoye and Ojo Samson Isumaila
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Babatunde Wasiu Adeoye: Department of Economics,University of Lagos,Nigeria
Ojo Samson Isumaila: Department of Economics,University of Lagos,Nigeria

Romanian Journal of Economics, 2022, vol. 54, issue 1(63), 80-94

Abstract: The study analyzed the impact of stock market liquidity on economic growth in Nigeria during periods of regulation and deregulation of the stock market. It seeks to ascertain if the stock market can serve as a reliable avenue to grow the Nigerian economy so that the government can quit excessive public borrowing that has been the practice in recent times. Time series data from 1960-2020 on stock market liquidity, government expenditure, foreign direct investment, interest rate and per capita income, obtained from Statistical Bulletin of the Central Bank of Nigeria (2020) are used for the study. The data are divided into two periods such as 26years of stock market regulation (1960-1985) and another 26 years of stock market deregulation (1995-2020). These compared the impact of stock market liquidity on economic growth between the two periods. Two stage least squares (2SLS) and Granger Causality methods were employed for the analysis The results showed that the impact of stock market liquidity on economic growth in Nigeria is positive and significant during the periods of stock market regulation and stock market deregulation. These results are consistent with the argument of the supply leading hypothesis. As such, development of the Nigerian stock exchange contributes to the growth of the Nigerian economy. However, the results revealed that the impact of stock market liquidity on economic growth in Nigeria was stronger during periods of stock market regulation. This goes to show that deregulation of the stock market has not promoted economic growth as much as regulation of the stock market has done in Nigeria. The adoption of deregulated policies in the Nigerian stock market came with volatility in stock market liquidity. This variation lowers the contributions of the stock market towards Nigeria economic performance. In other words, periods of high volatility in the Nigerian stock market lowers the positive contributions of the market to the domestic performance of the economy. The study concluded that economic growth in Nigeria is better enhanced when there are mild variations in stock market liquidity. Hence, stock market liquidity has stronger positive contributions to economic growth in Nigeria when volatility is low in the market. It is recommended that policy makers should come up with administrative actions and policies that address these issues of volatility in the Nigerian Stock market. Doing so would not only improve rational investment decision making, but would also help to remove uncertainty as often envisaged by players in the market. This can encourage increasing domestic productivity in Nigeria.

Keywords: stock market liquidity; financial deepening; economic performance; regulation; deregulation and stock price volatility (search for similar items in EconPapers)
JEL-codes: G23 O16 (search for similar items in EconPapers)
Date: 2022
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