Stock Markets and Industrial Development of Europe: Lessons for Nigeria

Abstract

This study examined the controversy on the direction of causality/impact between stock markets and industrial sector development of Europe with a view to unearthing some lessons for Nigeria’s quest for developing her industrial sector for rapid economic growth. The study employed cross sectional stock exchanges’ monthly data of eleven countries in Europe spanning the period January 2015 to November 2022. The variables for the study comprise Industrial output which served as proxy for industrial development (the dependent variable) and the explainable variables which include Market Capitalization, Stock market Index and Volume of Transactions as indices of stock market performance.  The econometric estimation tools employed for the Panel data relationship include the pooled regression analytic model with fixed and random effects as well as the Kao Residual Co-integration, the Likelihood Ratio, the Hausman specification and Residual cross section dependence tests. The empirical results of the study demonstrate that the relationship between market capitalization, stock market index and industrial output within the scope this study were mixed with both negative and positive effects whereas in all, there was no significant relationship between volume of transactions and industrial output. It was also found that the Likelihood ratio and Hausman tests support the fixed effect that unobserved/omitted variables are important explanatory variables for each country’s industrial development. This means that industrial development of the respective countries studied in Europe depend not only on stock market performance of the countries but also on other discretionary policies adopted by these countries. In addition, the Residual cross section dependence test found a cross-sectional dependence or correlation among the selected countries in the Euro zone. The import of these findings for Nigeria is that current efforts being undertaken by policy makers and the regulatory authorities should be intensified to boost activities in the stock market in Nigeria as this will impact positively on industrial development and the economy at large. We therefore recommend comprehensive policy thrust that incorporates not just capital market reforms but also monetary, fiscal, incomes, industrial, trade and foreign exchange policies all working in tandem to achieve a sustainable growth of the stock market.

Keywords: Industrial Output, Market Capitalization, Stock Market index, Pooled Regression, Europe

DOI: 10.7176/RJFA/15-5-03

Publication date: May 30th 2024