Stock market liquidity and volatility on the Nigerian Exchange Limited (NGX)

Globally, the importance of stock markets in facilitating the smooth exchange of financial assets cannot be overemphasized. The efficiency of stock markets across the globe including Nigeria is largely dependent on the adequacy of stock market liquidity. However, studies have shown that the Nigerian stock market is inadequately liquid which has led to inefficient stock trading with high cost of trading. Therefore, this study investigates the effect of stock market liquidity on stock volatility on the Nigerian Exchange Limited (NGX). The study used an ex post facto research design with a sample of top 30 most capitalized and liquid companies accounting for over 90% total market capitalization and trading volume was purposively selected for the study. Secondary monthly data spanning January 2014 to December 2021 were obtained from Security and Exchange Commission Statistical Bulletin while that of exchange rate and inflation were obtained from Central Bank of Nigeria Statistical Bulletin. The GARCH (1,1) model was employed as the estimating techniques. The result of the mean equation shows that stock market liquidity (β = 759.64, p-value = 0.0000) has a significant positive impact on volatility. Also, macroeconomic factors (β = 0.0217, p-value = 0.0000) has a significant positive impact on volatility. The variance equation reveals that current conditional volatility of stock market liquidity and volatility is influenced by their previous shocks and past volatility conditions (ai + βj = 0.9970). The study also found evidence of volatility clustering (GARCH = 1.0056) on the NGX. Therefore, the study recommended that investors should diversify their portfolios by combining highly liquid and less liquid stocks to balance the risk across different liquidity profiles, while regulators and policymakers should implement policies that incentivize market makers to provide liquidity by offering rewards and reducing regulatory barriers.