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THE CAUSALITY EFFECT OF STOCK MARKET DEVELOPMENT, FINANCIAL SECTOR REFORMS AND ECONOMIC GROWTH IN NIGERIA: THE APPLICATION OF VECTOR AUTOREGRESSIVE AND ERROR CORRECTION MODEL.
Abstract: The study was designed to investigate the causal link between stock market development, financial sector reform and economic growth in Nigerian. Time series econometric method of vector autoregressive (VAR) model of Sim (1980) and error correction model (VECM) was employed for the analysis. The study used quarterly time series data which covered the period 1981Q1 to 2010Q4. The cointegration test results suggest a positive long run relationship between the variables of cointegrating equations. In addition, we discover a bidirectional causality existing between stock market development and economic growth which suggest that economic growth and the market development promote each other. Furthermore, we equally found a bidirectional relationship between financial sector reform and economic growth which show their interdependent. Our result also suggests a unidirectional relationship between running from financial sector reform to stock market development. Thus, we also investigated the influence of business environment and institutional/legal framework on stock market development. The cointegration result shows a positive long run relationship between some variables of the cointegrating vectors.
Keyword: Growth, Reforms, Causality, Financial Sector, Stock Market, Autoregressive.