Abstract
This paper examines the relationship between stock market evolution and sustainable economic growth in Nigeria. The study employs Auto-Regressive Distributed Lag (ARDL)-bounds testing approach and a combined stock market indicators index to examine the relationship. The paper finds that, in the long run, stock markets have no positive and at best mixed effect on economic growth in Nigeria. This finding supports the numerous past studies, which have reported negative/mixed or inconclusive results on the effects of stock markets on economic growth. The paper, therefore, concludes that, there is the need for increasing financial deepening and the removal of bottlenecks in the financial sectors of the economy by providing further public and institutional education on the value of stock markets for economic development.
Highlights
Continuous and sustained mobilisation of resources is a requisite for economic growth and development
The stock markets do this by promoting efficient capital formation and allocation, as a tool in the mobilisation and allocation of savings among the competing choices, critical for economic growth; enabling governments and industry to raise long-term funds for new projects; and acting as an efficient capital allocator based on their rate of returns and level of risk
Where: Yt = real total GDP excluding the contributions from the oil and the financial service sectors (RGDP); MCt = real stock market capitalisation (% of GDP); VTt = real stock value traded (% of GDP); TRt = stock market turnover ratio (%); GEXPt = real government expenditure (% of GDP); FDIt = real foreign direct investments (% of GDP); CPSt = real credit to the private sector (% of GDP); SMDIND = stock market development index; φ0, δ0, and θ0 are constant parameters; φi, δi, and θi are long term elasticities or coefficients; εt = the white noise error term; and Ln = natural log operator
Summary
Continuous and sustained mobilisation of resources is a requisite for economic growth and development. This process has long been the focus of many development economists. To put it for a sustainable growth in any given economy, financial resources must be effectively and efficiently mobilised and allocated in such a way to harness the synergies between human, material and managerial resources for optimal economic output. The financial system of a country is the framework within which capital formation takes place, and the stock market is one of the vehicles through which capital can be accumulated and channeled for effective economic growth. The stock markets do this by promoting efficient capital formation and allocation, as a tool in the mobilisation and allocation of savings among the competing choices, critical for economic growth; enabling governments and industry to raise long-term funds for new projects; and acting as an efficient capital allocator based on their rate of returns and level of risk.
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