Abstract:
This paper provides both theoretical and empirical evidence for assessing the
relationship between bank capitalisation and stock market liquidity. It estimates
a bivariate VAR-GARCH (1.1) model to examine the linkage between
bank capitalisation and stock market liquidity in Nigeria using annual data
covering the period from 1986 to 2014. The findings of this paper show that
bank capitalisation enables banks to give out more loans to the public and this
increase in lending has a positive impact on stock market liquidity growth.
The findings support the view that capitalised banks are well equipped to absorb
and diversify risk, give out more loans, improve liquidity in the economy
and improve stock market performance.
