An Empirical Analysis of the Effect of Stock Market Crisis on Economic Growth: The Nigerian Case

Stock market crashes are social phenomena where external economic events combine with crowd behavior and psychology in a positive feedback loop where selling by some market participants drives more market participants to sell. This study empirically established the relationship between stock market crisis and Nigeria’s economic growth and also showed the relationship between stock market price crash and the crisis itself. In this light, this paper examined the interactive influence of movements in the major indicators of the performance of the Nigerian Stock Exchange Market such as the Market Capitalization (MK), All Share Index (ASI), Number of Deals (NOD), Volume and Value of Stock (VV), Total Number of New Issues (TNI) and Inflation (INFR) on the Nigerian Gross Domestic Product (GDP) using data from 1985-2009. To achieve the two objectives stated above, the Ordinary Least Square (OLS) method was employed. To correct for the OLS result biasness the log was applied to GDP and MK and also AR(1) was introduced to the first model. The result shows that stock market crisis has a highly significant effect on Nigeria’s economic growth. The result also shows a significant relationship between stock market price crash and the market crisis itself. It is therefore recommended that in the face of the ongoing crisis in the global stock market, the Nigerian stock market authorities should aim at making the market meet a world class standard. Also, all the sectors of the economy should act in a collaborative manner such that optimum benefits can be realized from their economic activities in the Nigeria market even in the hub of global crisis.