Financial Market Frictions in the Nigerian Stock Market

Abstract

Financial frictions constitute cost to trading and discourages investment on financial assets. It is on this premise; this study examines the effect of financial market frictions on stock market performance in Nigeria. Specifically, the effects of regulatory frictions, transaction costs and asymmetric information were inspected covering the period January 2010 to December 2021. The Generalized Method of Moments was applied on dynamic model to examine the effects. The findings reveal that regulatory frictions, transaction costs and asymmetric information significantly influence stock market returns. Specifically, cash reserve ratio has positive and significant effect on returns, while lending rate negatively and significantly influence market returns. Market illiquidity, and traded volume positively and significantly drive stock market returns, while market volatility, and exchange rate volatility negatively and significantly impacts stock market returns. This study concludes that regulations, asymmetric information and transaction costs constitute financial frictions and significantly impact stock market returns in Nigeria.

Keywords:     Asymmetric Information, Financial Market Frictions, Market illiquidity, Regulations, Stock Market Returns.