Financial Market Frictions and Stock Market Performance in Nigeria
Abstract
The study empirically investigated the impact of financial market frictions on stock market performance in Nigeria over the period 1995 to 2023. The specific objectives of the study were to find out how financial market frictions variables such as transaction cost (TCOST), capital gain tax (CGT), company income tax (CIT), liquidity rate (LIQ) and inflation rate (INFR) affect stock market performance. The autoregressive distributed lags (ARDL) technique was employed for the analysis of data and the results obtained revealed that in the short run, liquidity rate (LIQ) and previous values of total volume of trade has significant positive impact on stock market performance than the current value; while transaction cost (TCOST) and company income tax (CIT) do not significantly influence stock market performance in Nigeria. However, in the long run, transaction cost (TCOST) is the only financial market friction variable that significantly and positively affects stock market performance in Nigeria, while the other variables do not. The study recommends that, market regulators should strengthen current policy regarding trading in the Nigerian stock market; and frequent trading in the presence of transaction costs should be encouraged because, it substantially changes heterogeneity in demands across investors, resulting in a significant liquidity premium. This further justifies the importance of trading fees in asset pricing.
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