Macroeconomic Policies and Stock Market Liquidity: Evidence from Nigeria

Abstract

This study investigated the effect of macroeconomic policies on stock market liquidity in Nigeria using annual time series data that spanned from 1986 to 2018. Specifically, the paper analyzed how monetary and fiscal policies interactions affect stock market liquidity. Stock market liquidity was measured by stock turnover ratio. Unit root test confirmed that the variables were of mixed integration which necessitated the application of ARDL technique. The ARDL bounds testing revealed that a long-run relationship existed between fiscal and monetary policies instruments, and stock market turnover ratio. In the long-run, it was found that government debt had negative and significant effect on stock market turnover ratio while monetary policy variables such as monetary policy rate and cash reserve ratio had significant effect on stock market turnover, but only the policy rate was positive. In the short-run, all the explanatory variables were significant apart from monetary policy rate which was, though, significant after one period lag and liquidity ratio which was not significant at any level. The results of the ECM suggested that stock market liquidity was affected by the interactions of fiscal and monetary policies instruments in Nigeria. Consequently, the paper concluded that macroeconomic policies that would enforce sustainable and efficient financial market towards improving stock market liquidity be strictly implemented.