FINANCIAL DEEPENING, STOCK MARKET RETURNS AND LIQUIDITY MANAGEMENT IN NIGERIA

The capital market is an engine room of economic growth but the extent to which financial deepening influences this institution (capital market) that spur economic advancement of the country is still blurred and subject to debate among researchers. Therefore, this study investigates the causal relationship and impact of three financial deepening indicators on stock market returns and liquidity in Nigeria for the period 1985-2018. The study adopts correlational research design and obtains secondary annual time series data from the Central Bank of Nigeria statistical bulletin. The two-stage least squares regression and pairwise Granger causality test are methods of data analysis used. Findings reveal that financial deepening indicators-the ratio of money supply to gross domestic product, and market capitalization as a ratio of Gross Domestic Product (market capitalization ratio) have positive significant effect on stock market liquidity while ratio of credit to private sector to Gross Domestic Product, though positive but is not significantly related with market liquidity in Nigeria. Empirical findings also reveal that, though, the three financial deepening indicators are positively signed with stock market returns, only market capitalization ratio is found to exert significant effect on the stock market returns in Nigeria. Moreover, stock market liquidity is found to granger-cause financial deepening while a bi-directional causality exists between stock market returns and stock market deepening. Using multivariate modelling approach, this study contributes to financial deepening-stock market nexus literature by emphasizing the positive impact of three different financial deepening indicators on stock market performance in terms of returns and liquidity. This study concludes that financial deepening is a catalyst to capital market performance in Nigeria and therefore recommends that Government of Nigeria should further deepen the financial sector and its synergistic effect on capital market.