Financial Openness and Capital Market Development: Empirical Review of Selected West African Countries

Abstract

This study empirically determines the main effects of financial openness on capital market development for a group of West African Countries. The three countries selected - Nigeria, Ghana and Ivory Coast - have the most developed capital markets that could be said to be open and integrated at a reasonable level with external markets. The panel data regression technique was applied to annual data from the respective countries covering the period 1988 to 2010. Moreover, both the Fixed Effects and Random Effects estimations were carried out in the empirical analysis to investigate the relationships. The findings from the study indicate that higher financial openness in the sub-region would enhance the development of domestic capital markets. However, the pattern of foreign capital inflow to a country as well as the structure of external assets and liabilities appears to play a role in explaining the impact of financial openness on domestic capital markets within the West African sub-region. In this study, foreign liabilities that have direct link with domestic capital markets were shown to contribute more to capital market development in the domestic economy.

Keywords: Financial openness, capital market development, Panel data, West Africa