Financial Development, Economic Growth and Stock Market Volatility: Evidence from Nigeria and South Africa

Abstract

This thesis focuses on financial development, economic growth and market volatility in Nigeria and South Africa. For Nigeria, the thesis examines the long-run causality between financial development and economic growth. It uses three measures of financial development: financial development index measured using principal component analysis, bank credit to private sector, and liquid liabilities. For South Africa, the thesis evaluates the causal relationship between stock market development and economic growth. It uses both bank and stock market variables: bank credit to private sector, market capitalisation, turnover ratio, and value shares traded. The study applies Multivariate vector autoregressive (VAR) and Vector Error Correction Model (VECM). It further uses Generalised Impulse Response Function (GIRF) and Variance Decomposition (VDC). The results for Nigeria suggest the existence of unidirectional causality from economic growth to financial development using bank credit to private sector. While using liquid liabilities, it indicates bidirectional causality between financial development and economic growth. In the case of South Africa, the findings suggest the existence of bidirectional causality between financial development and economic growth using the banking system. However, when the stock market variables are used, the results indicate unidirectional causality from economic growth to stock market system. The thesis further examines the effect of financial liberalisation on the Nigerian and South African equity markets. It applies the Exponential Generalised Autoregressive Conditional Heteroskedasticity (EGARCH) model and endogenous structural break tests. These are examined over pre- and post-liberalisation periods. The official liberalisation dummy is added to the augmented EGARCH model to capture the effect of financial liberalisation. The findings show that none of the estimated break dates coincides with the official liberalisation dates for the two countries. When structural breaks are taken into account, volatility tends to decline following financial liberalisation, and the effect of financial liberalisation on the stock markets is negative and statistically significant.

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