The growth and development of an economy, depends greatly on how the country’s capital market thrives. The capital market can be an important facilitator of economic growth (Applegarth, 2004). Osaze (2000) is of the view that the capital market drives any economy to growth and development because the long term growth capital formation stems from it. Economic growth in a modern economy hinges on an efficient financial sector that pools domestic savings and mobilizes foreign capital for productive investments.

Based on its importance in accelerating economic growth and development, government of most nations tends to have keen interest in the performance of its capital market (Ewah, Esang and Bassey 2009). The capital market has been identified as an institution that contributes to the socio-economic growth and development of emerging and developed economies. (Donwa and Odia, 2010). Generally speaking, the importance of the capital market of any economy (developed or emerging) cannot be swept under the carpet). A direct linkage has been discovered to exist between the capital market of a nation and its economic growth.

Capital market is a market for financial assets which have a long indefinite maturity. It is the heart beat of every nation’s economy because of its ability to respond instantly to fundamental problems of change in an economy. Unlike money market instruments, capital market instrument mature over a period above one year. It is an institutional arrangement to borrow and lend money for a longer period of time. Globally, stock exchanges were established for the purpose of facilitating, regulating and controlling the business of buying and selling of securities that have been listed for trading on the exchange (Azu, 2012).

Nwite (2005) defined capital market as a financial market where long-term financial securities are traded on. It is a market that brings together, suppliers and buyers of long-term fiancés for investment.

Ologunde (2006) argued that the capital market consists of primary and secondary markets and it encourages savings and real sector investment in any economic environment. Aggregate savings are channeled into real investment which increases capital market stock and as well encourage economic growth of any nation.

Over the years, the relationship between stock market indicators and macroeconomic variables has been an issue of debate among financial scholars and economists (Osisanwa and Atanda, 2012; Obenwogu 2012; Eze, 2011). Most of them had argued that stock prices are influenced by some macroeconomic variables such as interest rate, gross domestic product (GDP), exchange rate, inflation and money supply. Some empirical study indicate that investors believed that monetary policy and macro-economic variables have a large influence on the volatility of stock prices. Christopher, Minsoo, Huahwa (2006) state that macro-economic variables can influence investor investment decision and as well as motivate many researchers to investigate the relationship between stock market returns and macro-economic variables.

The Nigerian stock exchange came into existence in 1960 September 15, under the name of Lagos stock exchange and came to be known as the Nigeria stock exchange (NSE) in December 1977, it began operations in 1961 with 19 securities listed for trading (George, 2008). The NSE has the following branches in major cities of the country. Kaduna, port-Harcourt, Kano, Onitsha, Ibadan, Abuja and Yola opened in 1978, 1980, 1989, 1990, 1990, 1999, 2002 respectively. It has 280 securities made up of 33 government stocks, 5 state government bonds, 33 industrial loans (debenture preference) stock and 209 equities of companies as at 2008. The exchange has 23 mutual funds on its memorandum quotation, about 3 million individual investors, hundreds of corporate investments, 20 dealing members and 27 registrars. (George, 2008; Mbedi, 2008).

The Nigerian stock exchange has been operating an automated trading system (ATS) since April 27, 1999, with dealers trading through a network of computer connected to a sever.The ATS has facility for remote trading and surveillance.

The market is currently operating nine braches across strategic business locations in Nigeria. The market has been operating to date through the activities of stock brokers or dealers who act as intermediary between lenders and borrowers. Securities and Exchange Commission (SEC) was established by SEC decree to 14 of 1979 amended in 1988 and 1999 (Anyo and Adelegan, 2008) as the apex regulatory and supervisory body of Nigeria stock market. The number of securities traded in Nigeria stock market has been growing since 1961 with ups and downs due to privatization, recapitalization, merger and acquisition and economic recession. The Nigeria market that started with only 19 securities in 1961 has 283 listed securities (including government stocks, industrial loans, bonds and equities) as at 24 May 2010, in both first and second tiers securities market (www.nigerianstockexchange.com).

The Nigerian Stock Exchange Market has maintained All Stock Index since January 1984 to date, and only common stock (ordinary) shares are included in the computation of the index (Okpara, 2010). The federal government of Nigeria deregulation policy, privatization of public corporations and recapitalization of banking sectors impacted on the Nigeria Stock Market return volatility compared with more stable markets like S &P 500. As a result of this economic policies, the government stocks which has been on the lead since the inception of Nigerian capital market started to decline (Annual Report, 2004).

In this study, the relationship between capital market instability and economic growth are determined using the All Share Index, Market Capitalization, Interest Rate and Stock Market Turnover. In line with this, the present study makes use of these variables to investigate the impact of capital market instability on economic growth in Nigeria.