Impact of Selected Macroeconomic Variables on Stock Market Development and Banking System Liquidity in Nigeria
- July 22, 2020
- Posted by: RSIS
- Categories: Banking and Finance, IJRISS
International Journal of Research and Innovation in Social Science (IJRISS) | Volume IV, Issue VII, July 2020 | ISSN 2454–6186
Anthony E. Ageme
Department of Banking and Finance, University of Nigeria, Enugu Campus, Nigeria
Abstract:- The main goal of this paper is to examine the impact of selected macroeconomic variables on stock market development and banking system liquidity in Nigeria using annualised data from 1986 to 2018. The error correction model was applied in estimating our model while the Johansen cointegration test was employed to determine if cointegrating relationships exist among our variables. We found that inflation, real interest rate and exchange rate had negative impact on stock market development while broad money supply was positively related to stock market development. On the other hand, inflation was found to negative impact on banking system liquidity whereas broad money supply, real interest rate and exchange rate had positive impact on banking system liquidity. We therefore conclude that inflation hinders stock market development and the liquidity of the banking system while broad money supply stimulates both indices. Moreover, while real interest rate and exchange rate were negatively related to stock market development, they were found to be positively associated with the banking system liquidity during the sample period. We recommend that sound monetary policy action is crucial to the growth of the Nigerian stock market as well is the liquidity of the Nigerian banking system. The estimation results further revealed that divergence from long-run equilibrium was being corrected at the speed of 68.34% annually. The results of Johansen indicators cointegration test showed that long-run relationships exist between stock market development, banking system liquidity and the selected macroeconomic variables.
Keywords: Stock market development; Banking sector development; Macroeconomic variables
I. INTRODUCTION
The relationships between stock market movements, the banking system liquidity and macroeconomic indices have been a subject of intense debate in finance and economic literatures over the years. The crux of the ongoing discourse has been on whether movements in stock prices are subject to changes in macroeconomic variables. The stock markets are understood to drive growths in industry and commerce by enhancing the mobilization of capital in developing and industrialized economies which leads to economic growth and development. Khodaparasti (2014) argues that stock market appears to be more efficient and more dynamic in the allocation of resources compared to banks.
