Equity Market Performance and Economic Growth in Nigeria: An Application of Vector Error Correction Model

Equity market has been seen as a vehicle for promoting economic growth by mobilizing long term funds for productive investment, but theoretical postulations differ over this role. The understanding of this role is of strong policy relevance in Nigeria. This paper therefore attempts to establish the existence of long-run relationship between economic growth and equity market performance with the view to improving policy formulation that will promote growth through capital market in Nigeria. Using data from Q1:1998 to Q4:2018, the Johansen and Juselius (1990) multivariate cointegration results establish long-run relationship between economic growth and each of equity market capitalization and turnover ratio. The test result could not find cointegration between economic growth and number of securities traded. The VEC Granger Causality/Block Exogeneity Wald test results establish a uni-directional relationship running from market capitalization and turnover ratio to economic growth, while bi-directional relationship exist between economic growth and number of securities traded. The parsimonious VECM for economic growth and equity market capitalization (model 1) shows that market capitalization and turnover impact on economic growth positively. The paper recommends that market capitalization as measure of equity market performance should be considered by policy makers as a veritable policy instrument for enhancing economic growth in Nigeria.