Skip to main content
Article thumbnail
Location of Repository

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

By Umar Bida Ndako


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

Publisher: University of Leicester
Year: 2010
OAI identifier:

Suggested articles


  1. (1956). A contribution to the Theory of Economic Growth”,
  2. (1984). A further investigation of the weekend effects in stock returns”,
  3. (2001). A generalised bivariate mixture model for stock price volatility and trading volume”,
  4. (1999). A Quantitative Reassessment of the Finance-Growth Nexus: Evidence from a Multivariate VAR”,
  5. (1998). Additional test for a unit root allowing for a break in the trend function at unknown time”,
  6. (1994). alternative methods of estimating long-run equilibrium relationships”
  7. (2008). An empirical analysis of structural changes in emerging market volatility”,
  8. (2000). An introduction to applied econometrics a time series approach”,
  9. (2004). Applied Econometric Time-Series”, 2nd edition
  10. (2007). Applied Econometrics: A Modern Approach Using Eviews and Microfit”,
  11. (1986). Are Forecasting Models Usable for Policy Analysis?” Quarterly Review, Federal Reserve Bank of
  12. (1982). Autoregressive Conditional Heteroskedasticity with Estimate of the variance
  13. (2005). Bank privatization and performance: Empirical evidence from Nigeria”,
  14. (2002). Bank-Based or Market-Based Financial system: which is better?” NBER Working paper series,
  15. (1999). Banks and Corporate Control in Japan”,
  16. (2006). Beyond Banking Sector Consolidation in Nigeria,” Presentation at the Global Banking Conference on Nigerian Banking Reform. Available at: [Accessed
  17. (2009). Causality between Financial Development and Economic Growth: an application of vector error correction and variance decomposition methods to Saudi Arabia”,
  18. (1993). Causality in integrated system”, London Business School Discussion paper, 27-93, November Hamilton J.D
  19. (2006). Changes in the dynamic behaviour of emerging market volatility: Revisiting the effects if financial liberalization”, Emerging Markets Review,
  20. (2000). Cointegration analysis in the presence of structural breaks in the deterministic trend”,
  21. (2000). Comparing Financial Systems”,
  22. (1991). Conditional Heteroskedasticity in Asset Returns a New Approach”,
  23. (1997). Credible economic liberalizations and over Borrowing”, American Economic Review 87,189–193.
  24. (1981). Credit Rationing in Markets with Imperfect Information”,
  25. (2003). Critical Values for multiple structural change tests”,
  26. (1981). Day of the week effects and asset returns”,
  27. (2002). Detecting Multiple Breaks in Financial Market Volatility Dynamics”,
  28. Detragiache (1998a), “The determinants of banking crises in developing and developed countries”,
  29. (1996). Does financial development cause Economic growth? Time series evidence from 16 countries”,
  30. (2005). Does Financial Development Lead Economic Growth?” A vector auto regression appraisal’
  31. (2007). Does Financial Development Precede Growth?” Robinson and Lucas Might be Right,
  32. (2005). Does financial liberalization spur growth?”
  33. (1996). Economic Growth, Convergence Clubs, and the Role of Financial Development”, Oxford Economic papers,
  34. (2005). Endogenous Growth Models And Stock Market Development: Evidence from Four Countries”,
  35. (2008). Endogenous Information Frictions,
  36. (1996). Equity Markets, Transactions Costs, and Capital Accumulation: An illustration”, The World Bank economic
  37. (1998). Estimating and Testing Linear Models with Multiple Structural Changes”,
  38. (1988). Estimating the Number of Change points via
  39. (2008). Exchange (2008), “market statistics” Available at:
  40. (2009). Exchange (2009), Available at: [Accessed 13
  41. (1989). Exchange Rate Volatility and US monetary policy: an ARCH application”,
  42. (1987). Expected Stock Returns and Volatility”,
  43. (1993). Finance and Growth: Schumpeter Might be Right”, The Quarterly journal of
  44. (2004). Finance and growth: Theory and evidence”, NBER working paper series,1076,
  45. (2000). Finance and sources of growth”,
  46. (1993). Finance, entrepreneurship, and growth theory and evidence”,
  47. (1973). Financial deepening in economic development”,
  48. (1998). Financial dependence and Growth”,
  49. (2000). Financial Determinants of Domestic Investment in SubSahara Africa: Evidence from Panel Data”, World Development,
  50. (2002). Financial development and economic growth in Midland China: a note on testing demand-following or supply-leading hypothesis”,
  51. (2004). Financial development and economic growth in Sub-Sahara African countries evidence from time-series analysis”,
  52. (1966). Financial development and economic growth in undeveloped countries”,
  53. (2008). Financial development and economic growth nexus: a time-series evidence from India”,
  54. (2008). Financial development and economic growth: a symbiotic relationship”,
  55. (1997). Financial Development and Economic Growth: Assessing the evidence”,
  56. (2006). Financial development and economic growth: evidence from China”,
  57. (2004). Financial Development and Economic Growth: Evidence from panel unit root and co integration Tests”,
  58. (2009). Financial development and economic growth: evidence from transition economies”,
  59. (2003). Financial Development and Economic Growth: Review of New evidence”,
  60. (2005). Financial Development and Economic Growth: The Case of Taiwan”,
  61. Financial development and economic growth: The Egyptian experience”,
  62. (2001). Financial Development and Economic Growth: The Role of stock market”,
  63. (1997). Financial Development and Economic Growth: View and Agenda”,
  64. (2002). Financial development and International Trade is there a link”?
  65. (2009). Financial development and openness: Evidence from panel data”
  66. (2005). Financial development, financing Choice and economic growth”,
  67. (2009). Financial Institutions and Markets Across Countries and over Time: Data and Analysis” World Bank Policy Research Working Paper No.
  68. (1986). Financial intermediary-coalitions”,
  69. (1998). Financial Intermediation and Economic growth in Developing Countries”,
  70. (2005). Financial intermediation and economic growth: evidence from West Africa”,
  71. (1991). Financial intermediation and endogenous growth”,
  72. (2000). Financial Intermediation and growth causality and causes”,
  73. (2001). Financial intermediation: A contributing factor to economic growth and employment Social finance programme”, international Labour Office. Social Finance Working Paper,
  74. (2006). Financial liberalisation and breaks in stock market volatility,”
  75. (2008). Financial liberalization and changes in the dynamic behaviour of emerging market volatility: Evidence from four Latin American equity markets”,
  76. (1998). Financial liberalization and financial Fragility.”
  77. (2002). Financial liberalization and stock market volatility in selected developing countries”,
  78. (2007). Financial liberalization, financial sector development and growth”, Evidence from Malaysia,
  79. (2009). Financial liberalization, stock market volatility and outliers in emerging economies”,
  80. (1997). Financial Liberalization, Stock markets and Economic Development”,
  81. (1993). Financial Markets and Growth: An overview”,
  82. (2001). Financial regulation in South Africa”, South Africa Financial Sector Forum,
  83. (1969). Financial structure and development”,
  84. (2008). Financial structure and economic growth”,
  85. (2000). Foreign Speculators and Emerging Equity Markets”,
  86. (1992). Further evidence of the great crash, the oil-price and the unit-root hypothesis”,
  87. (1986). Generalised Autoregressive Conditional Heteroskedasticity”,
  88. (1998). Generalised impulse response analysis in linear multivariate models”,
  89. (1998). Interest rates, saving and investment:
  90. (1994). Interest rates, saving, investment and growth in Mexico1960–90: Test of the financial liberalization hypothesis”,
  91. (1996). Interpreting cointegrating vectors and common stochastic trend”,
  92. (2002). Introductory Econometrics for Finance”, Cambridge,
  93. (2000). Liberalization, moral hazard in banking, and prudential regulation: are capital requirements enough?”
  94. (1997). Lutkepohl (2000),”Testing for the cointegrating rank of a VAR process with structural shifts”,
  95. (1995). Macroeconomic issues in an open developing economy a case study of Nigeria”, National Centre for Economic Management and Administration.
  96. (2002). Markets for risk and openness to trade: How are they related”?
  97. (1993). Measuring and testing the impact of News on Volatility”,
  98. (2005). Measuring Volatility Persistence in the Presence of Sudden Changes in the Variance of Canadian Stock Returns”,
  99. (1986). Modelling the Persistence of Conditional Variance a comment”,
  100. (1973). Money and capital in economic development”,
  101. (1995). Money, Interest, and Banking
  102. (1988). Money, Interest, and Banking in Economic Development.”
  103. (1997). Multiple trend Breaks and the Unit-Root Hypothesis”,
  104. (1992). New Directions in Econometric Practice: General to Specific Modelling, Cointegration and Vector Autoregression”, Edward Elgar,
  105. (2005). New introduction to multiple time series analysis”, SpringerVerlag
  106. (2004). Nigeria: Major Economic, Financial and Banking Indicators” Central Bank of Nigeria,
  107. (1988). On the mechanics of economic development”,
  108. (1996). Optimal Change point Tests for Normal Linear Regression”,
  109. (1979). Optimal contracts and competitive markets with costly state verification”
  110. Pardee and P.V.Wunnava (2007), “Financial liberalization and Economic Growth: Lesson from the South Africa Experience”,
  111. (2009). Penn World Table Version 6.3, income and prices at the
  112. (1993). perspective of Economic policy reforms in Nigeria”, Research Department,
  113. (1997). Price effects of stock market liberalization in Taiwan”, The Quarterly Review of
  114. (2009). Re-examining the financial development and economic growth nexus in Kenya”,
  115. (1995). Reflections on some critical aspect of economic management
  116. (2008). Regime-switching volatility of six East Asian emerging markets”,
  117. (1999). Relationship marketing in private banking in south Africa”,
  118. (2008). Reserve Bank 2007/2008, “Annual report,
  119. (1996). Residual-Based Tests for Cointegration in Models with Regime Shifts”,
  120. (1996). Return volatility and trading volume: an information flow interpretation of stochastic volatility”,
  121. (2005). Season of Hope, economic reform under Mandela and Mbeki”,
  122. (1989). Seasonal and day-of-the week effect in four emerging Stock markets”,
  123. (2008). Short-Run Pain, Long-Run Gain: Financial Liberalization and stock Market Cycles”,
  124. (2008). South Africa: Financial Stability Assessment, Including Report on the Observance of Standards and Codes on the following topic: Securities Regulation”, Publication Services,
  125. (2004). South Africa’s Financial sector ten years on: Performance since democracy”
  126. (2003). Stock market cycles, financial liberalization and volatility”,
  127. (2009). Stock market development and economic growth: evidence from seven sub- Sahara African countries”,
  128. (2004). Stock Market Development and Economic Growth: the Causal Linkage”,
  129. (1996). Stock Market Development and Financing Choices of Firms”, The World Bank economic
  130. (1996). Stock Market Development and Long-Run Growth”, The World Bank Economic Review,
  131. (2005). Stock market liberalization and volatility in the presence of favourable market characteristics and institutions”,
  132. (2000). Stock Market Liberalization, Economic Reforms, and Emerging Market Equity Prices”,
  133. (2004). Stock Market Liberalizations: Financial and Macroeconomic Implications”, Review of World Economics,
  134. (2000). Stock Market Openings: Experience of Emerging Economies”,
  135. (1991). Stock Market, Growth and Tax policy”,
  136. (1993). Stock markets and development”,
  137. (2004). Stock Markets, Banks, and Growth: Panel evidence”,
  138. (1996). Stock Markets, Corporate Finance, and Economic Growth: An overview”, The World Bank economic
  139. (1980). Stock returns and the weekend effect”,
  140. (1976). Studies of Stock Price Volatility Changes”,
  141. (2007). Supply-leading versus demand-following hypothesis: empirical evidence from three SSA countries”,
  142. (2000). Switching Volatility in Private International Equity Markets”,
  143. (2004). Testing for Changes in the Unconditional Variance of Financial Time Series”,
  144. (1994). Testing for cointegration in linear quadratic models”,
  145. (1992). Testing null of stationarity of against the alternative of unit root”,
  146. (1992). Testing structural hypothesis in a multivariate co integration analysis of the PPP and UIP for UK”,
  147. (1999). Tests of Cointegrating Rank with a Trend Break,"
  148. (1973). The behaviour of stock prices on Fridays and Mondays”,
  149. (2005). The Causal Relationship between stock, Credit Market and Economic Development: An Empirical Evidence for Greece”,
  150. (2003). The day of the week effect on stock market volatility and volume: International evidence”,
  151. (2001). The day of the week effect on stock market volatility”,
  152. (2006). The day-of –the week effect on stock market volatility and return: Evidence from Emerging Markets”,
  153. (2003). The Direction of causality between Financial Development and Economic Growth”,
  154. (2002). The effects of stock market development on growth and private investment in lower-income countries”,
  155. (1998). The evolution of debt and equity market in Economic development”,
  156. (1989). The great crash, the oil price shock and the unit root hypothesis”,
  157. (2003). The great reversals: The politics of financial development in the twentieth century”,
  158. (2000). The impact of Financial Liberalization on Stock Price Volatility in Emerging Markets”,
  159. (2002). The impact of Financial Liberalization Policies on Financial Development: Evidence from Developing Economies”,
  160. (1983). The price variability-volume relationship on speculative markets”,
  161. (1994). The relevance of p-star to UK monetary policy”,
  162. (1988). The statistical properties of daily foreign exchange rates: 1974-1983”,Journal of
  163. (1911). The theory of economic development”,
  164. (1999). The Twin Crises: The Causes of Banking and Balance-of-Payments Problems”,
  165. (2002). The world Price of Insider Trading”,
  166. (2008). Trade, regulation and income”,
  167. (1986). Two stage and Related Estimators and Their Applications”,
  168. (1994). Use of Cumulative Sums of Squares for Retrospective Detection of Changes of Variance”,
  169. (1999). Volatility in emerging stock markets”,
  170. (2008). What are the mechanisms linking financial development and
  171. (2008). World Economic Forum

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.