Financial Deepening on the Liquidity of Nigerian Stock Market: A Multi- Dimensional Study

Abstract

This study examined the effect of financial deepening on the liquidity of Nigeria capital market. The objective was to determine the effect of financial deepening variables on the liquidity of capital market. Time series data were sourced from Central Bank of Nigeria Statistical Bulletin. Capital market liquidity measured total market capitalization to all share price index was used as dependent variable while Percentage of Narrow money supply to Gross domestic products, Percentage of broad money supply to Gross domestic products, Percentage of private sector credit to Gross domestic products, Percentage of money outside the bank to Gross domestic products and Percentage of money market instrument to Gross domestic products. Ordinary least square methods of cointegration, granger causality test, unit root test and Vector error correction model. The Parsimonious error correction model showed that the financial deepening variable can explain 57.5% variation on the stock market liquidity, the model summary shows that the model is significant. The financial deepening shows that narrow money supply is negatively related to stock market liquidity at lag 1 but positive at lag 2 and lag 3, money market development is negatively related at lag 2 while broad money supply is negatively related at lag 1 and positive at lag 2. Money outside the bank is negatively related at Lag 1, Lag 2 and Lag 3while private sector credit is negatively related at Lag 1 and Lag 2. The T-statistics and the probability show that the variables are statistically not significant except private sector credit. The study found that financial deepening has significant effect on liquidity of Nigeria capital market. From the findings of the study, there is need to sustain a higher level of financial deepening in Nigeria. Incidences of poor liquidity should be minimized and private sector credits channeled to the real sector of the economy should be enhanced through monetary and macroec