STOCK EXCHANGE MARKET INSTRUMENTS AND CAPITAL FORMATION IN NIGERIA: EVIDENCE FROM AN ARDL MODEL

Abstract

Stock markets are expected to facilitate capital formation by mobilising savings, improving liquidity, disseminating information and providing firms with access to long-term finance. However, the expansion of stock-market indicators in Nigeria has not necessarily translated into a proportional increase in productive capital accumulation. This study examines the relationship between stock exchange market instruments and gross capital formation in Nigeria over the period 1986–2021. Specifically, it investigates the relationship between gross capital formation and the All Share Index, market capitalization, number of deals and number of stocks traded, while controlling for inflation and interest rate. The study employs annual secondary data and applies the Augmented Dickey-Fuller test, lag-selection procedures, the Autoregressive Distributed Lag (ARDL) bounds-testing approach, an error-correction model, serial-correlation diagnostics, CUSUM stability testing and pairwise Granger causality. The results indicate a mixture of I(0) and I(1) variables, validating the ARDL framework. The bounds test produces an F-statistic of 35.15, which exceeds the upper critical bound at the 1% level, establishing a long-run relationship among the variables. Although the individual contemporaneous coefficients of the stock-market instruments are not statistically significant at conventional levels in the reported long-run specification, the model demonstrates strong joint explanatory power. The error-correction coefficient of approximately −1.20 is negative and statistically significant, indicating rapid adjustment toward long-run equilibrium following short-run disturbances. Granger-causality results further indicate that gross capital formation precedes changes in inflation and the number of deals. The findings suggest that market size and trading activity should not be interpreted as automatic evidence of capital accumulation; rather, the effectiveness of the stock market depends on the extent to which financial-market activity is translated into productive investment.

Keywords: stock market; capital formation; market capitalization; All Share Index; ARDL; Nigeria; financial development; investment.