Measuring the Volatility of Stock Returns in Nigeria
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Abstract
There is quite an extensive literature documenting the behaviour of stock returns volatility in both developed and emerging stock markets, but such studies are scanty for the Nigerian Stock Exchange (NSE). Modelling volatility is an important element in pricing equity, risk management and portfolio management. For these reasons, this study investigates the behavior of stock return volatility of the NSE returns using GARCH (1,1). Monthly All Share Indices as a proxy for stock return of the NSE from January 1998, to December 2015, provided the empirical sample for investigating volatility persistence and asymmetric properties of the series. The results of GARCH (1,1) model indicate evidence of volatility clustering in the NSE return series. Overall results from this study provide evidence to show volatility persistence for the Nigeria stock returns data. The study recommends that timely disclosure and appropriate dissemination of company specific information to the investors will improve the efficiency of the stock market in Nigeria.
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References
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Arestis, P., P.O. Demetriades and K.B. Luintel (2015). Financial Development and Economic Growth: The Role of Stock Markets. Journal of Money, Credit and Banking, 33(2) p 16-41.
Baillie, Richard T. and Ramon P. DeGennaro. (1990). Stock returns and volatility. The Journal of Financial and Quantitative Analysis, Vol. 25, No. 2, pp. 203 – 214.
Bekaert, G. and Harvey, C. (1997). Emerging Equity Market Volatility. Journal of Financial Economics, Vol. 43, p 29-78.
Black, F. (1976). Studies of Stock Market Volatility Changes. Proceedings of the American Statistical Association, Business and Economic Statistics Section, pp. 177–181.
Bollerslev, T. (1986). Generalised Autoregressive Conditional Heteroskedasticity. Journal of Econometrics, 51,307-327.
Braun, P.A.; Nelson, D. B. and Sunier, A. M. (1995). Good News, Bad News, Volatility, and Betas. Journal of Finance, 1(5): 1575-1603.
Brook, C. and Burke, S.P. (2003). Information Criteria for GARCH Model Selection: An Application to High Frequency Data. European Journal of Finance, 9:6, 557- 580.
Campbell, J (1996): Consumption and the Stock Market: Interpreting International Experience”, NBER Working Paper, 5610.
Campbell, J.Y. and Hentschel, L. (1992). No News is Good News: An Asymmetric Model of Changing Volatility in Stock Returns. Journal of Financial Economics, 31: 281-318.
Chahal, M. S. & Jun Wang. (1998). Jump diffusion processes and emerging bond and stock markets: An investigation using daily data. Multinational Finance Journal, 1( 3), 169 – 197..
David, A. (1997). Fluctuating confidence in stock markets: Implications for returns and volatility. The Journal of Financial and Quantitative Analysis, 32(4), 427 – 462.
diBartolomeo, D. (2007). Fat Tails, Tale Tails and Puppy Dog Tail. Annual Summer Seminar-Newport, RI, June
Engle, R. (2001). Garch 101: The use of Arch/Garch models in applied econometrics. Journal of Economic Perspectives, 15( ), 157 – 168.
Engle, R. and Ng, V. (1993). Measuring and Testing the Impact News on Volatility. Journal of Finance, 48, 1748 - 1778.
Engle, R. F. (1982). Autoregressive Conditional Heteroscedasticity with estimates of the variance of the United Kingdom inflation. Econometrica, 50, 987-1007.
Engle, R. F., Forcard, S. M. and Fabozzi, F. (2005). ARCH/GARCH Models in Applied Financial Econometrics. Journal of Econometrics and Financial, Chapter 60, 4, 109 - 133.
Eraker, Bjorn. (2004). Do Stock Prices and Volatility Jump? Reconciling Evidence from Spot and Option prices. The Journal of Finance, 59(3), 1367-1403
Fama, E. (1965). The Behavior of Stock Market Prices. Journal of Business, 38 (1), 34–105.
Floros, Christo. (2007). The use of GARCH models for the calculation of minimum capital risk requirements: International evidence. International Journal of Managerial Finance, 3(4), 360 – 371.
Frimpong, J.M. and Oteng-Abayie, E.F. (2006). Modelling and Forecasting Volatility of Returns on the Ghana Stock Exchange using GARCH Models”, Munich personal RePEc Archive, 593, 1-21.
Galeotti, M. & Fabio S. (1994). Stock Market Volatility and Investment: Do Only fundamentals Matter? Economica, 61(242), 147-165
Glostan, L., R. Jagannathan, & D. Runkle. (1993). On the Relationship between the Expected Value and the Volatility of the Nominal Excess Return on Stocks. Journal of Finance, 48, 1779-1802.
Harvey, C.R. and Siddique, A. (1999). Autoregressive Conditional Skewness. Journal of Financial and Quantitative Analysis, 34 (4), 465-477.
Hongyu, P. and Zhichao, Z. (2006). Forecasting Financial Volatility: Evidence from Chinese Stock Market. Working paper in Economics and Finance Conference, 2, 63 - 86.
Hsieh, D. (1989). Modeling Heteroskedasticity in Daily Foreign Exchange Rates. Journal of Business and Economic Statistics, 7, 307-317.
Hsieh, D. (1988). Chaos and Nonlinear Dynamics: Application to Financial Markets. Journal of Finance, 46, 1839-1877.
Jayasuriya, S. (2002). Does Stock Market Liberalization Affect the Volatility of Stock Returns: Evidence from Emerging Market Economies. Georgetown University Discussion Series, August.
Karolyi, G. A. (2011).Why Stock Return Volatility Really Matters. Paper Prepared for Inaugural Issue of Strategic Strategic Investor Relations. Institutional Investor Journals Series, February.
Kumar R. & Makhija, A. K. (1986).Volatility Of Stock Prices and Market Efficiency. Managerial and Decision Economics, 7( 2), 119-122.
Lai, T. (1991). Portfolio Selection with Skewness: A Multi-Objective Approach. Review of Quantitative Finance and Accounting, 1, (3), 293-306.
Levine, R and S. Zervos (1996). Stock Market Development and Long-Run Growth. World Bank Economic Review, 10(1) p 323-339.
Ludvigson, S and C. Steindel (1999). How Important is the Stock Market Effect on Consumption. Federal Reserve Bank of New York Economic Policy Review, 5(1).
Mandelbrot, B. (1963). The Variation of Certain Speculative Prices. Journal of Business, 36 (4), 394-419.
Mankiw, Gregory N.; David Romer & Matthew D. Shapiro. (1991). Stock Market Forecastability and Volatility: A Statistical Appraisal. The Review of Economic Studies, 58(3), 455-477.
Nelson, Daniel B. (1991). Conditional Heteroskedasticity in Asset Returns: A New Approach. Econometrica,59(2), 347-370.
Ogum, G.; Beer, F. and Nouyrigat, G. (2005). Emerging Equity Market Volatility: An Empirical Investigation of Markets in Kenya and Nigeria. Journal of African Business, 6, (1/2), p 139-154.
Okpara, G.C. and Nwezeaku, N.C. (2009). Idiosyncratic Risk and the Cross-Section of Expected Stock Returns: Evidence from Nigeria. European Journal of Economics, Finance and Administrative Sciences, 17, 1-10.
Okpara, K. and Nwezeaku, O. (2009). Modelling Stock Returns Volatility in Nigeria Using GARCH Models. MPRA Paper No. 23432, posted 05. July 2010 / 19:53
Olowe, R. A. (2009). The Impact of the Announcement of the 2005 Capital Requirement for Insurance Companies on the Nigerian Stock market. The Nigerian Journal of Risk and Insurance, 6(1), 43-69.
Poterba, J. M (2014). Stock Market Wealth and Consumption. Journal of Economic Perspectives, 14(2) p 99-118.
Rizwan M. F and Khan S. (2007). Stock Return Volatility in Emerging Equity Market (Kse): The Relative Effects of Country and Global Factors. Int. Rev. Bus. Res. Papers 3(2): 362 - 375.
Rydberg, T. H. (2000). Realistic statistical modelling of financial data. International Statistical Review,68(3), 233 – 258.
Satchell, S. (2004). The Anatomy of Portfolio Skewness and Kurtosis. Trinity College Cambridge Working Paper.
Schwert, G. William. (1989). Why does stock market volatility change overtime? The Journal of Finance, 44(5), 1115 – 1153.
Starr-McCluer, M (1998). Stock Market Wealth and Consumer Spending. Board of Governors of the Federal Reserve System, Finance and Economics Discussion Paper Series, 98/20.
Taylor, S. (1994). Modeling Stochastic Volatility: A Review and Comparative Study. Mathematical Finance, 4, 183–204.
Taylor, S. J. (1986). Modelling Financial time Series, John Wiley & Sons, Chichester.
Theodossiou, P. and Lee, U. (1998). Relationship between Volatility and Expected Return Across International Stock Markets, Journal of Business Finance and Accounting, Vol. 22(2), p 289-300.
Thoedoiou, P.(2001). Skewed Generalized Error Distribution of Financial Assets and Option Pricing. Working Paper, School of Business, Rutgers University, New Jersey.
Verhoeven, P. and McAleer, M. (2003). Fat Tails and Asymmetry in Financial Markets.
Zakoian, J. M. (1994). Threshold Heteroscedastic Models. Journal of Economic Dynamic and Control. 18,
Zuliu, H. (1995). Stock market Volatility and Corporate Investment. IMF Working Paper, 95/102.
Arestis, P., P.O. Demetriades and K.B. Luintel (2015). Financial Development and Economic Growth: The Role of Stock Markets. Journal of Money, Credit and Banking, 33(2) p 16-41.
Baillie, Richard T. and Ramon P. DeGennaro. (1990). Stock returns and volatility. The Journal of Financial and Quantitative Analysis, Vol. 25, No. 2, pp. 203 – 214.
Bekaert, G. and Harvey, C. (1997). Emerging Equity Market Volatility. Journal of Financial Economics, Vol. 43, p 29-78.
Black, F. (1976). Studies of Stock Market Volatility Changes. Proceedings of the American Statistical Association, Business and Economic Statistics Section, pp. 177–181.
Bollerslev, T. (1986). Generalised Autoregressive Conditional Heteroskedasticity. Journal of Econometrics, 51,307-327.
Braun, P.A.; Nelson, D. B. and Sunier, A. M. (1995). Good News, Bad News, Volatility, and Betas. Journal of Finance, 1(5): 1575-1603.
Brook, C. and Burke, S.P. (2003). Information Criteria for GARCH Model Selection: An Application to High Frequency Data. European Journal of Finance, 9:6, 557- 580.
Campbell, J (1996): Consumption and the Stock Market: Interpreting International Experience”, NBER Working Paper, 5610.
Campbell, J.Y. and Hentschel, L. (1992). No News is Good News: An Asymmetric Model of Changing Volatility in Stock Returns. Journal of Financial Economics, 31: 281-318.
Chahal, M. S. & Jun Wang. (1998). Jump diffusion processes and emerging bond and stock markets: An investigation using daily data. Multinational Finance Journal, 1( 3), 169 – 197..
David, A. (1997). Fluctuating confidence in stock markets: Implications for returns and volatility. The Journal of Financial and Quantitative Analysis, 32(4), 427 – 462.
diBartolomeo, D. (2007). Fat Tails, Tale Tails and Puppy Dog Tail. Annual Summer Seminar-Newport, RI, June
Engle, R. (2001). Garch 101: The use of Arch/Garch models in applied econometrics. Journal of Economic Perspectives, 15( ), 157 – 168.
Engle, R. and Ng, V. (1993). Measuring and Testing the Impact News on Volatility. Journal of Finance, 48, 1748 - 1778.
Engle, R. F. (1982). Autoregressive Conditional Heteroscedasticity with estimates of the variance of the United Kingdom inflation. Econometrica, 50, 987-1007.
Engle, R. F., Forcard, S. M. and Fabozzi, F. (2005). ARCH/GARCH Models in Applied Financial Econometrics. Journal of Econometrics and Financial, Chapter 60, 4, 109 - 133.
Eraker, Bjorn. (2004). Do Stock Prices and Volatility Jump? Reconciling Evidence from Spot and Option prices. The Journal of Finance, 59(3), 1367-1403
Fama, E. (1965). The Behavior of Stock Market Prices. Journal of Business, 38 (1), 34–105.
Floros, Christo. (2007). The use of GARCH models for the calculation of minimum capital risk requirements: International evidence. International Journal of Managerial Finance, 3(4), 360 – 371.
Frimpong, J.M. and Oteng-Abayie, E.F. (2006). Modelling and Forecasting Volatility of Returns on the Ghana Stock Exchange using GARCH Models”, Munich personal RePEc Archive, 593, 1-21.
Galeotti, M. & Fabio S. (1994). Stock Market Volatility and Investment: Do Only fundamentals Matter? Economica, 61(242), 147-165
Glostan, L., R. Jagannathan, & D. Runkle. (1993). On the Relationship between the Expected Value and the Volatility of the Nominal Excess Return on Stocks. Journal of Finance, 48, 1779-1802.
Harvey, C.R. and Siddique, A. (1999). Autoregressive Conditional Skewness. Journal of Financial and Quantitative Analysis, 34 (4), 465-477.
Hongyu, P. and Zhichao, Z. (2006). Forecasting Financial Volatility: Evidence from Chinese Stock Market. Working paper in Economics and Finance Conference, 2, 63 - 86.
Hsieh, D. (1989). Modeling Heteroskedasticity in Daily Foreign Exchange Rates. Journal of Business and Economic Statistics, 7, 307-317.
Hsieh, D. (1988). Chaos and Nonlinear Dynamics: Application to Financial Markets. Journal of Finance, 46, 1839-1877.
Jayasuriya, S. (2002). Does Stock Market Liberalization Affect the Volatility of Stock Returns: Evidence from Emerging Market Economies. Georgetown University Discussion Series, August.
Karolyi, G. A. (2011).Why Stock Return Volatility Really Matters. Paper Prepared for Inaugural Issue of Strategic Strategic Investor Relations. Institutional Investor Journals Series, February.
Kumar R. & Makhija, A. K. (1986).Volatility Of Stock Prices and Market Efficiency. Managerial and Decision Economics, 7( 2), 119-122.
Lai, T. (1991). Portfolio Selection with Skewness: A Multi-Objective Approach. Review of Quantitative Finance and Accounting, 1, (3), 293-306.
Levine, R and S. Zervos (1996). Stock Market Development and Long-Run Growth. World Bank Economic Review, 10(1) p 323-339.
Ludvigson, S and C. Steindel (1999). How Important is the Stock Market Effect on Consumption. Federal Reserve Bank of New York Economic Policy Review, 5(1).
Mandelbrot, B. (1963). The Variation of Certain Speculative Prices. Journal of Business, 36 (4), 394-419.
Mankiw, Gregory N.; David Romer & Matthew D. Shapiro. (1991). Stock Market Forecastability and Volatility: A Statistical Appraisal. The Review of Economic Studies, 58(3), 455-477.
Nelson, Daniel B. (1991). Conditional Heteroskedasticity in Asset Returns: A New Approach. Econometrica,59(2), 347-370.
Ogum, G.; Beer, F. and Nouyrigat, G. (2005). Emerging Equity Market Volatility: An Empirical Investigation of Markets in Kenya and Nigeria. Journal of African Business, 6, (1/2), p 139-154.
Okpara, G.C. and Nwezeaku, N.C. (2009). Idiosyncratic Risk and the Cross-Section of Expected Stock Returns: Evidence from Nigeria. European Journal of Economics, Finance and Administrative Sciences, 17, 1-10.
Okpara, K. and Nwezeaku, O. (2009). Modelling Stock Returns Volatility in Nigeria Using GARCH Models. MPRA Paper No. 23432, posted 05. July 2010 / 19:53
Olowe, R. A. (2009). The Impact of the Announcement of the 2005 Capital Requirement for Insurance Companies on the Nigerian Stock market. The Nigerian Journal of Risk and Insurance, 6(1), 43-69.
Poterba, J. M (2014). Stock Market Wealth and Consumption. Journal of Economic Perspectives, 14(2) p 99-118.
Rizwan M. F and Khan S. (2007). Stock Return Volatility in Emerging Equity Market (Kse): The Relative Effects of Country and Global Factors. Int. Rev. Bus. Res. Papers 3(2): 362 - 375.
Rydberg, T. H. (2000). Realistic statistical modelling of financial data. International Statistical Review,68(3), 233 – 258.
Satchell, S. (2004). The Anatomy of Portfolio Skewness and Kurtosis. Trinity College Cambridge Working Paper.
Schwert, G. William. (1989). Why does stock market volatility change overtime? The Journal of Finance, 44(5), 1115 – 1153.
Starr-McCluer, M (1998). Stock Market Wealth and Consumer Spending. Board of Governors of the Federal Reserve System, Finance and Economics Discussion Paper Series, 98/20.
Taylor, S. (1994). Modeling Stochastic Volatility: A Review and Comparative Study. Mathematical Finance, 4, 183–204.
Taylor, S. J. (1986). Modelling Financial time Series, John Wiley & Sons, Chichester.
Theodossiou, P. and Lee, U. (1998). Relationship between Volatility and Expected Return Across International Stock Markets, Journal of Business Finance and Accounting, Vol. 22(2), p 289-300.
Thoedoiou, P.(2001). Skewed Generalized Error Distribution of Financial Assets and Option Pricing. Working Paper, School of Business, Rutgers University, New Jersey.
Verhoeven, P. and McAleer, M. (2003). Fat Tails and Asymmetry in Financial Markets.
Zakoian, J. M. (1994). Threshold Heteroscedastic Models. Journal of Economic Dynamic and Control. 18,
Zuliu, H. (1995). Stock market Volatility and Corporate Investment. IMF Working Paper, 95/102.