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Abstract
The study examines the relationship between market liquidity and economic growth in Nigeria over the period of 1987-2012 using time series data. The starting point of our analysis was to check for the time series properties of the underlying data using the Augmented Dickey Fuller (ADF) and the Engle-Granger procedure. The existence of non-stationarity and co-integration were established which necessitated an ECM for the analysis. But first, the popular Granger-Causality Test was conducted to ascertain whether Market Liquidity Granger-causes Economic Growth or vice-versa. The empirical result from the Granger causality test indicates that market liquidity does not granger-cause GDP; neither does GDP granger-cause market liquidity. From the result, Market Liquidity captured by its proxies of Turn-over Ratio, Market Capitalization and Private Sector Credit are statistically significant in explaining GDP. Based on the findings, we suggest the monetary authorities should focus on policies that will develop financial infrastructure that will ensure macroeconomic stability under which economic agents can make decisions that promote rapid financial market development and subsequent capital market performance. The problem of low awareness about the operations of the capital markets in the economy can be reduced by educating the populace about the opportunities available in the market.