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IMPACT OF CAPITAL MARKET VOLATILITY ON ECONOMIC GROWTH IN NIGERIA (1985 – 2016)
Abstract: This study examined the impact of capital market volatility on Nigerian economic growth using real Gross Domestic Product as proxy for economic growth. Volatility of returns in financial markets is a major stumbling block to attracting investment in developing economies. The selected capital market variables include market capitalisation ratio, all-share index, trading volumes, financial deepening ratios, dividend yield and gross domestic product. The data were obtained from the World Bank Development Reports, various issues of Central Bank of Nigeria Annual Report and the National Economic statistics from the National Bureau of Statistics. The analysis used time series data on capital market indicators for the period 1985-2016.. The availability of sufficiently long time series data on the aforementioned variables served as an additional criterion for their selection. Annual data spanning 1985 to 2016, a total of 31 observations, were employed; all variables were transformed logarithmically to homogenize the data and smoothen the fluctuations. The procedure adopted involved the use of multivariate regression analysis. Autoregressive Conditional Heteroskedasticity models and its extension were used to find the presence of the stock market volatility on the Nigerian stock market. The Augmented Dickey Fuller (ADF) and Variance Decomposition (VDC) were used to capture the long-run relationship between the macroeconomic indicators. Our variance decomposition analyses to a large extent confirmed that capital market volatility is only able to explain a small proportion of the forecast error variance of real GDP. Hence, we find evidence of a muted effect of capital market volatility on the Nigeria’s economic development.
Key Words: Capital Market Volatility, Economic Growth, Financial Markets, Financial Deepening