Market Participation and Asset Price Volatility: Evidence from the Nigeria Stock Market

Abstract

We investigate the effect of market participation on asset price volatility in the Nigerian stock exchange from February 1985 to March 2022. Stylized facts established include that the log relative return of the Nigerian stock exchange all share index is leptokurtic, negatively skewed and exhibits volatility clustering confirmed by the presence of ARCH Effect in the residual of the estimated mean equation (mean reversion). The EGARCH (1, 1) model with Student’s t error distribution was the tool of analysis. Results indicate that internal shocks – the ARCH term significantly affect future volatility.  Volatility persistence (long memory) emerged from the results of this study as a feature of the Nigerian stock exchange. However, despite showing the right negative sign, this study failed to conclude on the leverage effect component as the asymmetric coefficient was not significant. Market participation was found to have no significant effect on asset price volatility though it had a positive coefficient. It is therefore suggested that investors and other stock market participants take advantage of the stylized facts revealed in this study as they make their investment decisions.