Stock Market and Economic Growth in Nigeria: Evidence from the Demand-Following Hypothesis

Abstract

The capital market connects the financial sector with other non-financial sectors of the economy and, in the process, facilitates growth and economic development. Literature abound on the impact of stock market on economic growth however, little literature are available from the demand-following hypothesis which claims that it is the growth of the economy that causes increased demand for financial services which, in turn, leads to the development of financial markets. It is against this background that we examined the impact of stock market development on economic growth from the demand-following arguments from the period 1996-2010. Employing the Ordinary Least Square (OLS) regression, we found that economic growth has positive and non-significant impact on market capitalization ratio and turnover ratio of the Nigerian stock exchange but had a negative on the Nigerian stock market value traded ratio. Our study thus recommends an increased effort by the Nigerian government to grow the economy through rapid industrialization, provision of basic amenities such as electricity, roads, dams etc as this will in turn lead to the development of the financial sector.

Keywords: Stock Market. Economic Growth, Demand-Following Hypothesis