Capital Market Volatility and Real Sector Expansion in Nigeria

Abstract

This study utilized data from the first quarter of 2010 to the fourth quarter of 2021 to explore how volatility in the capital market can influence the real sector of the Nigerian economy. With the use of the generalized autoregressive conditional heteroscedasticity (GARCH) approach, we realized that there is no volatility clustering in the Nigerian market capitalization given that the estimate of lagged value of residual is negative and significant. Also, the decay of the response function on a quarterly basis being 0.3054 is quite low and is symptomatic of response functions to shock dying at a faster pace. Therefore, a new shock in the Nigerian capital market it will have impact on the market capitalization for a short period making the market less predictable. This makes the Nigerian capital market to be efficient since the market is not easily predictable. The VAR result revealed that the market capitalization put forth a positive and significant influence on economic growth; with the impulse response function indicating that economic growth responded positively to shocks in market capitalization. The paper concludes that the capital market needs be streamlined in order to avoid volatility clustering in the future, in order to maintain the efficiency of the market.