IIARD International Institute of Academic Research and Development

IIARD INTERNATIONAL JOURNAL OF BANKING AND FINANCE RESEARCH (IJBFR )

E-ISSN 2695-1886
P-ISSN 2672-4979
VOL. 10 NO. 3 2024
DOI: https://doi.org/10.56201/ijbfr.v10.no3.2024.pg28.43

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Fuel Subsidy Removal, Oil Price Shocks and Stock Market Performance in Nigeria: Evidence from a Threshold GARCH Model

James A. Sarakiri (Ph.D)

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Abstract

This study investigates the effects of fuel subsidy removal and oil price shocks on stock market returns and volatility in Nigeria within the TGARCH framework using weekly data from 25/11/2012 to 21/04/2024. More specifically, the study, using a simple TGARCH model that incorporates conditional standard deviation in the mean equation with a generalized error distribution, investigates two market-wide indices: namely, All-share index and NSE 30 index as well as three industry-specific indices: namely, banking, oil and gas, food, beverages and tobacco. We find that although weekly market returns are generally persistent and can be predicted from their immediate history, they are insensitive to changes in conditional variance, and hence do not exhibit a risk premium effect, which contradicts the capital asset pricing model. Additionally, we find that fuel subsidy removal has no effect on weekly returns of all major indices in the Nigerian stock exchange. However, while it decreases the volatility of two industry-specific indices: namely, oil and gas and FBT, it does not affect the volatility of All share index, NSE 30 index and banking index. Finally, our empirical results provide evidence that oil price shocks significantly affect the performance of both the banking and oil and gas sectors but not their volatility. On the contrary, oil price shocks have a significant impact on the volatility of three indices: namely, All-share index, NSE 30 index, and FBT index and again not their returns.

keywords:

Oil price shocks, fuel subsidy removal, market returns, market volatility, TGARCH

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References:

Adekunle, I. A., & Oseni, I. O. (2021). Fuel subsidies and carbon emission: evidence from
asymmetric modelling. Environmental science and pollution research, 28(18), 22729-22741.

Al-Hajj, E., Al-Mulali, U., & Adebola, S. S. (2017). The influence of oil price shocks on stock
market returns: Fresh evidence from Malaysia. International Journal of Energy Economics
and Policy, 7(5), 235-244.

Babalola, A., & Salau, T. J. (2020). Petroleum pump price and consumer price index in Nigeria: A
case for or against total subsidy removal–panel dynamic analysis. Timisoara Journal of
Economics and Business, 13(2), 107-128.

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