West African Emerging Economies: Comparative Insights on Ghana’s and Nigeria’s Stock Market Development

Abstract

The study examines the long-run and causal relationship between stock market development and West African emerging economies in a comparative context of Ghana and Nigeria. Based on Autoregressive Distributed Lag (ARDL) bounds test approach, the findings support the evidence of long-run cointegration between stock market development and economic growth in Ghana, whereas further evidence reveals an insignificant positive long-run impact on economic growth. In contrast, there is no long-run cointegration between stock market indicators and economic growth in Nigeria. Furthermore, in the context of the Vector Error Correction Model (VECM) and Vector Autoregressive model (VAR) for Ghana and Nigeria respectively, the Granger causality test indicates that the direction of causality only runs from economic growth to stock market development, unidirectional) in both countries. Nonetheless, the empirical evidence on growth-led finance is specifically feeble in Nigeria. Given these results, the paper posits that stock markets could well play a crucial role in stimulating growth in West Africa. However, to attain this goal, there is a need to launch reforms that entail the overhaul of the legal and regulatory framework as well as principles underlying effective supervision. Also, Ghana and Nigeria should ensure that the stock markets are properly integrated into their respective economies and the strong integration of the two markets through robust institutional and governance structures. These could thus foster the development of stock markets in the two countries.

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“…Thus, a causal association in at least from one direction is expected based on Engle and Granger (1987), which stated that if the series are cointegrated, VECM Granger causality can, therefore, be adopted so as to ascertain possible causal relation among the series in the long run. This approach is critical to guiding policy-makers for the adoption of workable measures, and it has been previously adopted by Enisan and Olufisayo (2009) and Fagbemi and Ajibike (2022) for the same purpose. The technique's model and hypotheses are presented in Appendix A as Equations ( A1) and (A2).…”