Stock market development and nexus of market liquidity: The case of Fiji

Abstract

AbstractThe purpose of this paper is twofold: First, to explore the macroeconomic and institutional factors influencing stock market development (SMD) in Fiji during the period 1996–2018 and second, to explore the causes of the prolonged sluggish nature of the South Pacific Stock Exchange (SPX) in Fiji. A mixed‐method approach was employed: autoregressive distributed lag (ARDL) testing framework was used to estimate the influence of the structural determinants in Fiji while descriptive and narrative analysis was used to explain the status of the SPX. The study findings partially confirmed the findings of previous studies. The findings that economic growth promotes SMD while inflation is negatively correlated to SMD were consistent with previous findings. However, the finding that regulatory quality and banking sector development have negative impacts on SMD was contrary to the findings of previous studies. Many determinants, which have been shown to have significant impact on SMD in other studies, did not show any significant impact on the SPX in the Fijian context, particularly the stock market liquidity showed no correlation to SMD and not distributed normally. Exploration of the nexus of the market liquidity reveals that present regulatory conditions are not conducive for the stock market to be vibrant and suggests eliminating excessive paperwork and entry restrictions are critical, not only to attract new players to the market but also to increase trading volumes. We argue that the concentration of ownership and market disintegration resulted in the current sluggish status of the SPX.