Revisiting the Capital Market-Economic Growth Nexus in Nigeria: Evidence from the ARDL Approach

Abstract

This study examined the effect of capital market development on economic growth in Nigeria using annual time-series data covering the period 1990-2024. Specifically, the study investigated the influence of market capitalization ratio, stock market turnover ratio, and value traded ratio on economic growth while controlling for exchange rate. An ex post facto research design was adopted, and secondary data were obtained from the World Development Indicators and the Central Bank of Nigeria Statistical Bulletin. The study employed the Autoregressive Distributed Lag (ARDL) modelling approach to estimate both the short-run and long-run relationships among the variables after conducting unit root and bounds cointegration tests. The findings revealed the existence of a stable long-run relationship between capital market development and economic growth. The long-run estimates showed that market capitalization ratio and stock market turnover ratio exerted positive but statistically insignificant effects on economic growth, whereas value traded ratio exhibited a negative and insignificant effect. Exchange rate, however, had a positive and statistically significant influence on economic growth. The error correction mechanism indicated that approximately 44.3% of short-run disequilibrium is corrected annually, confirming the stability of the long-run equilibrium relationship. The study concludes that although Nigeria's capital market has expanded considerably, improvements in market size, market activity, and trading activity have not translated into significant economic growth. The study therefore recommends that policymakers prioritize measures aimed at improving market efficiency, strengthening investor confidence, promoting productive investment, and maintaining macroeconomic stability to enhance the contribution of the capital market to sustainable economic growth.