Political Stability, Quality of Governance and Stock Market Performance in Nigeria: A VECM Approach

Abstract

Governance structure is riddled with rent-seeking behaviour by public agents, public institutions are not only ineffective and retroactive but there is also no regards to rule of law, no accountability and above policy inconsistencies which affects the economy including vibrant development of the stock market. This paper examined the impact of political stability and quality of governance market performance in Nigeria from 1986-2022. The variables of this study are credit to the private sector, gross domestic product, inflation, and investment (domestic), and broad money supply. The other variables are political stability, quality of governance government expenditure, unemployment and value of stocks traded. The data for these variables were sourced from the Central Bank of Nigeria Statistical Bulletin and the National Bureau of Statistics of various years. This paper was anchored on the efficient market hypothesis and the impulse response function and variance decomposition was used. The result suggested that market capitalization was strongly endogenous in the short-run predicting itself about 93 percent and 86 to 85 percent in the long-run while a one standard deviation of shock from gross domestic product to market capitalization continuously decreased from periods 1 to 10. The conclusion from the analysis of the findings is that political stability and quality of governance impacted on stock market performance. This paper recommended economy-wide reforms tom stem the impact of negative shock on the economy and stock market.