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.
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