Financial Market Liberalization and Stock Market Liquidity: Time Data Analysis from Nigeria

This study examined the linkage among financial sector liberalization variables and stock market liquidity in Nigeria, using annual data from 1990 to 2023. In conducting the analysis, this study utilized Error Correction model and Granger Causality tests. Stock Market Liquidity was modeled as the function of Savings Rate Liberalization, Lending Rate Liberalization, Exchange Rate Liberalization, Capital market liberalization measured by increase or decrease on foreign portfolio investment and Current account liberalization measured by net official finance. The study found that 69.4 variations in stock market liquidity were explained by variation in financial sector liberalization. The error correction term found significant correction of about 138 percent from short run disequilibrium to long run equilibrium while the lag selection validates the application of lag I. at lag I, the study found that the variables are positively related to stock market liquidity. Granger causality results indicated that there is unidirectional causality running from exchange rate liberalization to stock market liquidity. The study concludes relationship between financial sector liberalization and stock market liquidity. It recommended the effective and implementable monetary policies to back the interest rate liberalization to enhance liquidity of the stock market and policies to deepen the operational efficiency of the financial to cushion the negative effect of the financial sector liberalization on the liquidity of the stock market. The exchange rate liberalization should be deepened and the policies revisited to meet the stock market liquidity and Nigerian Interest rate liberalization such as lending, monetary policy rate and prime lending rate should be harmonized with the objective of enhancing the liquidity of stock market.