Capital Market Development and Economic Growth Nexus from Nigeria

NIJAF MAU
Jul 25
1 min read

Authors: UMARU Sale Madaki and ISMAILA Mohammed

Abstract

This study examines the relationship between capital market development and economic growth in Nigeria from 1999 to 2022 using a Structural Vector Autoregression (SVAR) model. It focuses on key capital market indicators: All Share Index, Value of Transactions and Real Interest Rate analyzing their impact on GDP growth. The results show that a one standard deviation increase in All Share Index (ASI) lead to 0.85% increase in GDP in the second quarter, demonstrating the stock markets short term stimulative effect. Value of Transactions (VLT) has a positive effect, with a 10% increase in trading activity raising GDP by about 0.5% in the short run. Real Interest Rate (RIR) exhibits the most pronounced effect, with a one standard deviation shock reducing GDP growth by up to 1.2% by the fourth quarter. Long-term analysis reveals that shocks to Value of Transaction and Real Interest Rate explain over 57% of GDP fluctuations, with Real Interest Rate alone accounting for 20% of GDP forecast errors. This underscores the impacts of real interest rates and stock market activity on economic growth in Nigeria. The study concludes that macroeconomic stability is crucial for financial development, and recommends urgent infrastructure upgrades in trading, payments, and risk management systems. It suggests leveraging digital innovations to mobilize retail savings into capital markets and expanding securities trading through fintech. Additionally, it emphasizes the importance of prioritizing the domestic debt market, stabilizing monetary and fiscal policies, and allowing exchange rate flexibility to enhance economic growth.

Keywords: Capital Market Development, Economic Growth, Structural Vector Autoregression, All Share Index, Value of Transactions, Real Interest Rate