FINANCIAL DEEPENING AND LIQUIDITY OF NIGERIA’S CAPITAL MARKET: A TIME SERIES STUDY

LENYIE, Leesi
Department of Banking and Finance
Rivers State University Port Harcourt, Nigeria
ROGERS-BANIGO, Idanyingi
Department of Banking and Finance
Rivers State University Port Harcourt, Nigeria
OMUBO-PEPPLE, Stella Nathan
Department of Banking and Finance
Rivers State University Port Harcourt, Nigeria
ABSTRACT
This study examined the effect of financial deepening on capital market liquidity in Nigeria. The study
adopted a descriptive research design. The study utilized secondary data obtained from bulletins from
Nigerian Stock Exchange (NSE), Security and Exchange Commission (SEC) and Central Bank of
Nigeria (CBN). Capital market liquidity was the dependent variable while capital market liquidity
proxied by narrow money supply, broad money supply, private sector credit, money outside the bank
and money market instrument was the independent variable. Ordinary least square methods of
cointegration, granger causality test, unit root test and Vector error correction model were used for
data analyses. The study found that proxies of financial deepening explain 57.5% of variation in
capital market liquidity. The study also found that financial deepening (narrow money supply, broad
money supply, private sector credit, money outside the bank and money market instrument) has
significant effect on Nigeria’s capital market liquidity. The study thus concludes that capital market
development in Nigeria depends on financial deepening, and recommends that monetary and
macroeconomic policy regulators should sustain high level of financial deepening in Nigeria, and that
incidences of poor capital market liquidity should be minimized by channeling private sector credits
to the real sector of the economy.
Keywords: Capital market liquidity, financial deepening, money market instrument, total market
capitalization