FINANCIAL MARKET FRICTIONS AND TRADE IN THE NIGERIAN EXCHANGE LIMITED: EVIDENCE FROM AUTOREGRESSIVE DISTRIBUTED LAGS (ARDL) BOUND TESTING APPROACH
Aigbovo Omoruyi, Ph.D and Isibor Britny Osaigbovo
Volume 9 Issue 2
Abstract
This study examined the effects of financial market frictions on trading in the Nigerian Exchange Limited (NGX) using time series data spanning the period 1981 to 2019. Market frictions were considered both in terms of direct market costs of trading and tax-based factors. Tax-based frictions were decomposed into capital gains tax rates and dividend tax rates in order to improve the robustness of the study. A dynamic strategy was devised for the study and the short-run and long-run impacts were observed within an autoregressive distributed lags (ARDL) model. The results show that generally, tax-based frictions exert significant dynamic effects on trading in the Nigerian Exchange Limited. In particular, dividend taxes reduce trading activities, while capital gains taxes improve trading activities. Direct trading transaction costs were however shown to have no significant impact on trading in the Nigerian Exchange Limited. Essentially, though different set of trading patterns, expectations drive trading in the Nigerian Exchange Limited, direct costs may not contribute to these factors. Indeed, investors may have evolved trading awareness information that guides their trading activities which has resulted in consistently and efficiently allocating transaction cost elements within the trading system. Considering the results of the econometric analysis, the study recommends that government should reduce the existing dividend tax rate in order to reverse its adverse effect on trading activities in the Nigerian stock market. Keywords: Financial Frictions, Nigerian Stock Exchange, Transaction Cost, Dividend Tax Rate, Autoregressive Distributed Lags (ARDL)
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