Financial Market Frictions and Stock Market Performance in Nigeria: Evidence from ARDL Bounds Testing

• Lawson E. Igbinovia

• Emmanuel S. Shittu

This study examined the effect of financial market frictions on stock market performance in Nigeria from 1990 to 2024. Specifically, the study assessed how transaction costs, bid-ask spreads, regulatory quality, and trading volume influence the All-Share Index (ASI) of the Nigerian stock market. Annual time-series data were obtained from the Central Bank of Nigeria, Nigerian Exchange, World Bank databases, and related official sources. The study employed the Autoregressive Distributed Lag (ARDL) bounds testing approach to analyse both short-run and long-run relationships among the variables. The findings revealed the existence of a long-run relationship between financial market frictions and stock market performance. In the long run, regulatory quality and trading volume had significant positive effects on stock market performance, while inflation had a significant negative effect. Transaction costs showed a negative but weak influence, whereas bid-ask spread was not statistically significant. The study concludes that improved market regulation, lower trading costs, and stronger market participation are essential for enhancing stock market performance in Nigeria. The Nigerian capital market should continue to rationalise explicit trading costs so that entry and exit become less expensive for both retail and institutional investors. Regulators should deepen enforcement consistency, disclosure discipline, and investor-protection mechanisms because regulatory quality has a measurable long-run payoff for ASI. Macroeconomic authorities should recognise that inflation and exchange-rate conditions feed into stock market performance.

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