Financial Deepening and Stock Market Development: Evidence from Nigeria

This study was carried out to examine the long and short run relationship that exists between financial deepening and stock market development in Nigeria. Annual data for stock market capitalization, broad money/GDP ratio, financial sector contribution to GDP ratio, and credit to private sector/GDP ratio, commercial banks liabilities/GDP ratio and banking sector liquidity for the period 1981 – 2019 were analysed using Time Series analytical techniques. The study employed the Augmented Dickey Fuller unit root test, Johansen co-integration test, Vector auto-regression and Vector error correction mechanism. Findings from the analysis shows that financial deepening have significant positive effect on stock market development on the long run but negative insignificant effect in the short run. The study concludes that financial deepening has positive effect on stock market development in the long run in Nigeria. However financial deepening does not have significant effect on stock market development in the short run. The study therefore recommends that efforts should be made to enhance financial deepening which will make more funds available to the private sector. Furthermore, rates on short term loans and advances should also be reduced for stock purchase purposes.