Non-Macroeconomic Factors of Stock Market Volatility: A Vector Error Correction Approach

Stock market price volatility is not solely affected by macroeconomic factors but non macroeconomic factors also play a significant role. The study examined the non-macroeconomic factors that drive stock market price volatility in the Nigerian economy for the period of 1985 to 2016 using Vector Error Correction model (VECM). The VECM confirmed a long run relationship among stock market price volatility, gross domestic product, interest rate, average education level of investors and the number of listed firms. The study further applied the impulse response function (IRF) and the Variance decomposition (VD) to evaluate the dynamic component of the VECM model. The study established that the average education level of investors had a positive influence on stock market price volatility. However gross domestic product, interest rate and the number of listed firms were found to decline in response to positive shock on stock market price volatility. The findings of this study are valuable for policy makers especially in creating awareness about the crucial effect of non macroeconomic factors on stock market volatility in the Nigerian economy. The study recommended financial literacy of investors as it has the potential of boosting investment in the stock market. Investors are also encouraged to get their business listed on the stock exchange to improve diversification and stability in the stock market.