Market Microstructure and Price Discovery in the Nigerian Exchange (NGX): An Analysis of Liquidity, Volatility, and Informational Efficiency in the Era of Digital Trading

chukwudi S Johnson

Abstract

This study examined the market microstructure and price discovery in the Nigerian Exchange with a view to determining liquidity volatility and informational efficiency in the era of digital trading. The specific objectives were to determine how market microstructure measures such as market liquidity, market volatility, Bid-Ask-Spread and capital inflow impacts on stock prices at the Nigeria stock market. Expost facto design was adopted. Data were sourced from Central Bank of Nigeria Statistical Bulletin and Nigeria Stock Exchange factbook from 1990-2024. Analysis were carried out in different phasis. First, descriptive statistics was used to determine the mean performance. OLS was used to test the short run. Unit root test was adapted to determine the stationarity while Johasen Cointegration and ECM were adopted to find out the long run relationship between the variables. The study found that a positive and statistically significant relationship between market liquidity and price impact. The analysis revealed a positive and significant relationship between bid-ask spread and price. Market volatility exhibited a negative and statistically significant effect on price impact. Market capitalization was found to positively impacted on price. This implies that when there is announcement of recapitalization stock prices rises. The study concluded that market liquidity, market capital, bid-ask-spread and volatility significantly influence stock prices in the Nigerian equity market. This effect is amplified when the market lacks sufficient depth to absorb large orders without altering prices. It was recommended that institutional and large investors should implement execution strategies such as trade slicing or algorithmic trading to reduce the price impact of large trades, especially in less liquid stocks. Market Regulators (SEC Nigeria and NGX) should strengthen market-making programs to improve liquidity, particularly in mid-and small-cap stocks.

Source: semanticscholar · PDF

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