5 Research Article CAUSAL RELATIONSHIP BETWEEN STOCK MARKET PERFORMANCES AND ECONOMIC

This study examines the causal relationship between stock market performance and economic growth in Nigeria using quarterly data for the period of 1990-Q1 to 2010-Q4. The ADF and PP tests suggest that the series are random work processes in their level form. The work adopts a Pair-wise Granger Causality to test within multivariate co-integration and vector error correction model (VECM) framework. Three different stock exchange indicators (stock market capitalization, all-share index and value of shares traded) were used as proxy for stock market performance to test the direction of causality between the variables. Thus we have three VAR models. Findings indicate evidence of long run equilibrium relationship between stock market performance and economic growth. It further shows that there is strong bidirectional causality running from stock market performance to economic growth and from economic growth to stock market performance. The estimated co-integrated vector shows that stock market performance exerts positive impact on economic growth in Nigeria. Evidence from Vector Error Correction term reveals that the speed of adjustment is high when SMC, ASI and VST were used as proxy for stock market performance. The Impulse Response Function (IRF) shows that shocks in stock market do not deter economic growth. The ASI accounted for 67.1 % of the forecast error variance while GDP accounted for 32.9%. This implies that information in the stock exchange market seem to be the driving force for economic growth. The study affirms a positive links between the stock market and economic growth, and suggests the pursuit of policies that are geared towards rapid development of the stock market