Determinants of Stock Market Development in Nigeria: A Cointegration Approach

Abstract

This study examined the determinants of stock market development for the period of 1977-2010. The study further investigated the long run and short run relationship between the variables, using ex-post facto research design and the utilization of Johansen Co-integration and Error Correction Model (ECM) approach. The empirical result indicates that market capitalization, credit to private sector and exchange rates are all important determinants of stock market development both in the long run and short run in Nigeria as these variables have positive effect and thus stimulate economic growth in Nigeria while inflation and saving rate had negative impact on stock market development in Nigeria. These results as they stand have some policy implications and it therefore follows that to achieve accelerated stock market development and economic growth in Nigeria, monetary authorities should effectively moderate and control the inflation and savings rate so as to sustain macroeconomic stability. This study therefore recommended amongst others that policy makers should be concerned with stock market liquidity, given that market capitalization is a strong indicator of stock market development in Nigeria.