Submit your papersSubmit Now
For Enquiries: [email protected]
IIARD LogoIIARD

Measuring Volatility Effects on Daily Stock Market Returns in Nigeria

John Okey Onoh

Abstract

Adequate knowledge about the volatility, performance and efficiency of stock returns remains vital and essential information to investors. These will guide not only investment decisions but also planning for economic growth and development. Given that the Nigerian Stock Exchange has existed, its ability to generate confidence is still in doubt given the recent crash witnessed in the market. It means the confidence the exchange is expected to instill in investors is still not commensurable. It was against the forgoing that this study examined the impact on stock market returns of volatility in the Nigerian Stock market. The study adopted the ex-post facto research design and data were obtained from daily reports of the Nigerian Stock Exchange from 2nd January, 2001 to 31st December, 2015. The study used the ARCH/GARCH to test the hypothesis stated. The results also revealed that, there is a significant ARCH/GARCH (volatility) effect on stock market returns of the Nigerian Stock market. This is because it was revealed that for stock returns, p-value was less 0.05 and equal to zero showing that the ARCH test statistics exceeds its critical value. Therefore, ARCH/GARCH test strongly rejects the null hypothesis that there is no significant ARCH/GARCH (volatility) effect in given return of all shares index. The study thus concludes that the stock returns contained correlation in its returns or squared returns, which meant that ARCH/GARCH process was found. After testing the dataset, the models were set up and run; the parameters were estimated for each of the model with their conditional volatility. As the conditional volatility is the main ingredient for forecasting volatility and its depended on conditional variance. Then, we check the quality of our estimated parameter and volatility. First test the innovations of each, that there are any kind of correlation is present or not. It was found that there is no significant correlation and ARCH/GARCH effect was present. Ther

Keywords

Volatility; stock market; daily returns; Nigerian Capital Market

References

Ajayi, R.A. Mehdian. S & Perry M. J. (2004). The day-of-the-week effect in stock returns: Further evidence from eastern european emerging markets. Markets Finance & Trade, Vol. 40, No. 4, pp. 53-62 Akgiray, V. (1989). Conditional heteroskedasticity in time series of stock returns: Evidence and forecasts. Journal of Business 62(1):55-80 Amihud, Y. (2002). Illiquidity and stock returns: Cross-section and time-series effects. Journal of Financial Markets 5 (2002) 31–56 Amihud .Y, Haim .M & Lasse .P (2005). Liquidity and asset pricing foundations and trends in finance. Journal of Financial Markets, Vol. 5, 1, 269-364 Arumugam S. (1997). Day-of-the-week effects in stock returns: Empirical evidence from indian equity market. Mimeo, UTI Institute of Capital Markets Banerjee, A.& Sarkar. S (2006). Modeling daily volatility of the indian stock market using intra-day data. IIM calcutta, WPS no. 588/march Beck, T. (2002). Financial development and international trade: Is there a link? Journal of International Economics, 57, pp 107-131 Beck, T., Demirguc-Kunt, A., Levine, R & Maksimovic (2001). Financial structure and economic development: Firm, industry and country evidence, in: Financial structure and economic growth: A cross- country comparison of banks, markets and development. Cambridge, MA: MIT Press: pp. 189-242 Berument, Hakan & Kiymaz H., (2001). The day of the week effect on stock market volatility. Journal of Economics and Finance, 25(2), pp 181-193 Black, F. (1976). Studies in stock price volatility changes, proceedings of the 1976 business meeting of the business and economic statistics section., American Statistical Association, 177 – 181. Bologna, P & Cavallo L (2002). Does the introduction of stock index futures effectively reduce stock market volatility? Is the „futures effect? immediate? evidence from the italian stock exchange using GARCH”, Applied Financial Economics, 12:183- 192 Brock W.A, Dechert W, & Scheikman J (1987). A test for independence based on the correlation dimension. University of Wisconsin-Madison Mimeo Brooks, C. (2002). Introductory econometrics for finance. Cambridge University Press, New York, U.S.A Chaudhury S. K., (1991). Seasonality in share returns: Preliminary evidence on day-of the- week effect. Chartered Accountant (india), 40:10 –109 Demetriades, P.O. & Hussein, K.A (1996). Does financial development cause economic growth? Time series evidence from sixteen countries. Journal of development economics, 51, pp 387-411. Demirgue Kunt, A & Levine, R. (1996). Stock market, corporate finance and economic growth: An overview. The World Bank Review, 10(2): pp. 223-239 Dimitri V & Jiang .W (2012). Market liquidity: Theory and empirical evidence. The Paul Woolley Centre Working Paper Series no. 32, financial markets group discussion paper no 709 p 415 -891. Ekanem W (2003). Stimulating the growth of indigenous enterprises. The NSE Market Annual. Ekanem W (2003). Investment opportunities in the capital market. The NSE Market Annual, NSE. Ekundayo, I.K. (2002). Creating a conducive environment for investment in the nigerian capital market. paper presented at public enlightenment on opportunities in the capital market for industrial development of kogi state, Lokoja 29th march to1st april. Engle, R.F & Bollerslev T (1986). Modeling the persistence of conditional variance. Econometric Review, 5, 1-50. Evans, P. (1995). How to estimate growth equations consistently. paper presented at the 7th World congress of the econometric society, tokyo Fama, E.F (1965). The behaviour of stock market prices. Journal of Business. Vol. 38, No. 1, pp. 34-105 Figlewski, S.(1981). Futures trading and volatility in the GNMA market. Journal of Finance, 36, 445-84 Fry, M.J. (1995). Money, interest and banking in economic development., 2nd edition, The John Hopkins University Press, Baltimore, U.S.A Geert. B & Guojun. W (1997). Assymetric volatility and risk in equity markets. National Bureau of Economic Research 1050, Massachusetts avenue, Cambridge, ma 02138 Goswami, R.& Anshuman R.V (2000). Day of the week effects on the bombay stock exchange. The ICFAI Journal of Applied Finance, 6(4):31-46 Granger,CW.J (1987). Investigating causal relations by econometric models and cross spectral methods. Econometrica, 37: 428-438 Guha Deb, S. & Mukherjee, J.(2008). Does stock market development cause economic growth? a time series analysis for indian economy. International Research Journal of Finance and Economics, Issue 21, pp 142-149 Harris, R.D.F (1997). Stock markets and development: a reassessment. European Economic Review, 41:139-46 Hau. H & Helene R (2006). Exchange rate equity prices and capital flows. Review of Financial Studies, American economic review, p. 273-317. Hinich, M.J. & Patterson D.M (1985). Evidence of nonlinearity in daily stock returns. Journal of Business and Economic Statistics 3 : 69-77 Hsieh D. (1989). Modeling heteroskedasticity in daily foreign exchange rates. Journal of Business and Economic Statistics, 7:307 – 317 Huberman, Gur & Dominika Halka (2001). Systematic liquidity. Journal of Financial Research, 24, p 161-178. Kamara A, Miller T.W. & Siegel A.F (1992). The effect of futures trading on the stability of standard and poor 500 returns. The Journal of Futures Markets, 12(6):645-658 Kim, E. H., & Singal V (1993). Opening up of stock markets by emerging economies: effects on portfolio flows and volatility of stock prices, in portfolio investment in developing countries. World Bank Discussion Paper no.228 ed. by stijn claessens and sudarshan gooptu, washington: world bank 383-403 King, R.G., & Levine, R. (1993a). Finance and growth: schumpeter might be right. Quarterly Journal of Economics, 108, No. 3, pp. 717-38. King, R. G., & Levine, R. (1993b). Finance, entrepreneurship and growth: theory and evidence. Journal of Monetary Economics, 32, pp. 513-42 Kletzer, K. and Pardhan, P.(1987). Credit markets and patterns of international trade. Journal of Development Economics, 27, pp. 27-70 Levine, R. (2001). International financial integration and economic growth. Review of International Economics 9 (4): 688-702 Levine, R., Loyola, N. and Beck, T. (2000). Financial intermediation and growth: causality and causes. Journal of Monetary Economics, 46, pp. 31-77 Lumsdaine R. L. and S. Ng (1999). Testing for ARCH in the presence of a possibly mis specified conditional mean. Journal of Econometrics, 93:253-279 Malkiel, B.G (1992). Efficient market hypothesis, in Newman P., Milgate M. and Eatwell J. (eds.). New Palgrave Dictionary of Money and Finance, Macmillan, London. Mandelbrot, B.(1963).The variation of certain speculative prices. Journal of Business 36(3), 394-419. Mazumdar, T. (2004). FII inflow to india: their effect on stock market liquidity. ICFAI Journal of Applied Finance 10(7), pp. 5-20. Mestel, R., Gurgul, H. & Majdosz P (2003). The empirical relationship between stock returns, return volatility and trading volume on the austrian stock market. University of Graz, Istitute of Banking and Finance, Research Paper. Najand, M. (1991). A GARCH examination of the relationship between volume and price variability in futures market, Journal of Futures Market, 11:613-21 Nilsson, B. (2002). Financial liberalization and the changing characteristics of Nordic stock returns, Department of Economics Lund University Nigerian stock exchange daily report (various days), www.nse.com.ng Nyong, M.O (2005). Predictability and volatility of stock returns in three emerging markets: nigeria, south africa and brazil, Nigerian Journal of Economics and Development Matters. 2 (1):12-29. Onwumere, J.U.J (2005). Business and economic research method, lagos: don-vinton limited Osinubi, T. S.,& L. A. Amaghionyeodiwe (2003). Stock market development

More Articles from IIARD INTERNATIONAL JOURNAL OF ECONOMICS AND BUSINESS MANAGEMENT