Volatility Risk-Pricing and Stock Returns In Emerging Market: Evidence from Nigeria

Saidi Atanda Mustapha, Bibiana Oluhukwu Njogo and Lawrence Imeokparia

The paper investigates the role of both systematic volatility (SVol) and idiosyncratic volatility (IVol) in asset pricing over the sample period 2005 to 2017 in the Nigerian Stock Market. Systematic volatility is measured by the standard deviation of past daily price returns and idiosyncratic volatility is measured by the standard deviation of residuals from the Augmented Fama and French three (A-FF3) factor model. The paper adopts a parametric methodology consisting of the least square estimation technique (Fully Modified-OLS and OLS). Findings suggest that investors could increase their portfolios’ returns by using IVol strategy to sort stock portfolios rather than using SVol strategy, the reason is that the effects coming from macroeconomic factors outweigh that of the market factors. The paper also validates the positive relationship between idiosyncratic volatility (systematic volatility) and stock price returns for Nigeria, this is in line with the results of Malkiel and Xu (2006) and Fu (2009) using US stocks, and Drew et al (2002) and Brockman et al (2009) both for Hong Kong stock market. The policy implications of these findings reveal that investors (domestic and international) can increase portfolio returns, rather than dropping stocks, by going long on high IVol stocks and short on low IVol stocks in the Nigerian Bourse.

DOI : https://doi.org/10.21102/irbrp.2018.09.142.07