Effect of Economic Recession on Financial Markets in Nigeria: Evidence from GDP Growth Rate, Inflation, and Exchange Rate Volatility on Stock Market Performance

Economic recessions exert significant destabilizing effects on financial markets, with macroeconomic deterioration, falling GDP growth, rising inflation, and exchange rate volatility, transmitting into equity market performance through investor confidence, corporate earnings, and capital flow channels. Nigeria experienced its most severe recession in 25 years in 2016 (GDP growth of -1.6%) and a second recession in 2020 (GDP growth of -1.79%), creating empirical contexts for examining recession-financial market linkages. Despite the macroeconomic significance of these recession episodes, empirical evidence on the specific channels through which GDP growth rate, inflation, and exchange rate volatility affect Nigerian stock market performance remains inconclusive. This study examined the effect of economic recession, operationalized through GDP growth rate, inflation rate, and exchange rate volatility, on stock market performance in Nigeria over the period 2014 to 2023. An ex-post facto longitudinal time-series research design was adopted. Secondary data were sourced from the Central Bank of Nigeria (CBN) Statistical Bulletins, the World Bank World Development Indicators (WDI) database, and the Nigerian Exchange Group (NGX) Annual Reports. Data were analyzed using the Autoregressive Distributed Lag (ARDL) bounds testing approach, supported by pre-estimation unit root tests (ADF and PP), descriptive statistics, and diagnostic tests. Results show that GDP growth rate exerted a significant positive effect on stock market performance (β = 0.412, p < 0.05); inflation rate exerted a significant negative effect (β = -0.387, p < 0.05); and exchange rate volatility exerted a significant negative effect (β = -0.319, p < 0.05) on the NGX All-Share Index. The ARDL bounds test confirmed a long-run co-integrating relationship among the variables. Conclusion: Economic recession indicators significantly impair stock market performance in Nigeria. Macroeconomic stabilization policies targeting inflation control, exchange rate management, and GDP growth are critical for safeguarding financial market stability.