Abstract
This study explored the casual linkage between depth of development in Nigerian stock market and economic growth as well as the short-run and long-run dynamics of the stock market. We used annual data of growth rate of gross domestic product at current market price, stock market capitalization and value of stock traded ratio to gross domestic product from 1981 to 2015. The data were sourced from Nigerian Stock Exchange factbook of various issues and Nigeria Bureau of Statistics. Prior to estimation, the models were subject to diagnostic test such as heteroscekasticity, normality and multicollinearity test. The results of Augmented Dickey-Fuller (ADF) and Phillips Perron (PP) and tests revealed that the variables are integrated of order one.
The results of Granger causality test show that there is no causal linkage between depth of development in Nigerian stock market and economic growth at 5% level of significance. The Johansen cointegration test showed that there is a long-run linkage between depth of development in Nigerian stock market represented by market capitalization and value of stock traded ratio to Gross Domestic Product (GDP) and economic growth reflected by growth rate of GDP at 5% level of significance. The results of error correction model indicates that once the Growth Rate of Gross Domestic Product (GRGDP) and Market Capitalization Ratio (or Value of Stock Traded Ratio) deviates away from the long-run equilibrium, then Growth Rate of Gross Domestic Product makes all adjustment to restore the long-run equilibrium by correcting disequilibrium by about a factor of 1.25 (or 1.21).
The result of this study provide evidence of the existence of a long run relationship between depth of development in Nigerian stock market and economic growth. However, depth of development in Nigerian stock market does not propel economic growth neither does economic growth stimulate depth of development in Nigerian stock market. This study contribute to existing literature on the long run significant relationship between stock market development and economic growth in the context of Nigeria.
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