Impact of Financial Deepening on Stock Prices in Nigeria

Financial system plays an important role in mobilizing savings, promoting information sharing, improving resource allocation and facilitating diversification and risk management (Sahay, et al., 2015). Financial deepening is the provision of liquidity and other financial services in order to increase market participation and productivity. Financial deepening increases flexibility in the financial markets, lowers cost of capital and boosts public and private investments. Financial deepening also has stabilizing effects in an economy by helping to absorb shocks arising from international crises and limiting adverse spillovers (Wang, et al., 2011).

Although, there are different measures of financial deepening, the measures that have consistently appeared in the literature include stock market turnover and liquidity (Rayman & Mustafa, 2015), broad money supply as a ratio of GDP (Nzotta & Okereke, 2009), the ratio of the value of stock traded to GDP and the ratio of market capitalization to GDP (Okoli, 2012), and Credit to private sector as a ratio of GDP.

This paper examines the relationship between financial deepening and stock market performance in Nigeria. Using VAR methodology, it seeks to determine whether there is a causal relationship between stock prices and liquidity, as measured by the ratio of money supply to GDP and the ratio of credit to private sector to GDP. The main contribution of this paper is the use of monthly data as none of the existing empirical studies in this line of research in Nigeria uses data at monthly frequency.

The remainder of this paper is organized as follows: Section 2 reviews some of the related empirical studies. Section 3 describes the data, methods and econometric models. Section 4 reports results and discusses findings and section 5 concludes.