Abstract
This paper provides both theoretical and empirical evidence for assessing the relationship between bank capitalisation and stock market liquidity. It estimates a bivariate VAR-GARCH (1.1) model to examine the linkage between bank capitalisation and stock market liquidity in Nigeria using annual data covering the period from 1986 to 2014. The findings of this paper show that bank capitalisation enables banks to give out more loans to the public and this increase in lending has a positive impact on stock market liquidity growth. The findings support the view that capitalised banks are well equipped to absorb and diversify risk, give out more loans, improve liquidity in the economy and improve stock market performance.
Highlights
Stock markets play a major role in financial intermediation in both developed and developing countries by channelling idle funds from surplus to deficit units in the economy
The findings of this paper show that bank capitalisation enables banks to give out more loans to the public and this increase in lending has a positive impact on stock market liquidity growth
Concerning the effect of stock market turnover volatility on bank capitalisation volatility, we find evidence of significant spillovers but there is no evidence of spillovers running from bank capitalisation volatility to stock market turnover volatility
Summary
Stock markets play a major role in financial intermediation in both developed and developing countries by channelling idle funds from surplus to deficit units in the economy Al-Faki [2] views the stock market as an aspect of the financial market comprising a network of specialised financial institutions, series of mechanisms, processes and infrastructure that in various ways facilitate the bringing together of suppliers and users of medium to long term capital for investment in socio-economic development projects. This research paper examines the impact of bank capitalisation (i.e. increase in the ratio of banks’ equity to total assets) on stock market growth using data from Nigeria. The objective of this study is to answer the questions concerning the impact of increasing banks’ capital on stock market performance and the transmission channels of bank capitalisation to stock market growth.
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