Financial liberalization and the development of stock markets in Sub-Saharan Africa

This study sought to investigate the relationship between financial liberalization and stock market development in four Sub-Saharan African stock markets using quarterly data for the period 1975 - 2014. The analysis focused on three dimensions of liberalization in isolation, which are capital account liberalization, stock market liberalization and financial sector liberalization. Hence, the empirical analysis uses three Bayesian VAR models for each market studied. The results from the investigation show a positive correlation between stock market development and the liberalization of stock markets and the financial sector in all four countries, which advocates for the opening of financial markets to international investors, as well as the deepening of the sector. Additionally, a positive long-run response of stock market development to all three forms of liberalization in all the markets considered suggested that greater focus should therefore be put on increasing financial openness by removing the restrictions in the financial sectors of the respective economies, as this will promote the effectiveness of the deliverance of credit to the private sector, efficient credit evaluation and public sector surveillance, which is provided through the stock market. Finally, the analysis uncovered negative correlation between stock market development and inflation in all four markets, suggesting that policy makers in these countries should pay special attention to inflation targeting policies in order to positively contribute to enhancing these markets.