MEASURING NIGERIAN STOCK MARKET VOLATILITY

Abstract

The contribution of stock market to the growth process of any economy is not in doubt. However, volatility in stock market can trigger a rise in cost of capital which is capable of affecting economic growth negatively. This has implication for portfolio allocation, asset pricing and market risk measure. This paper is concerned with these issues and aims at empirically testing for the presence or otherwise of volatility clustering in the Nigerian stock market. Using time series data of share prices for the period 1995 to 2009, the Autoregressive Conditional Heteroscedasticity (ARCH) model and Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model were estimated. The estimates indicate that the market exhibits volatility clustering. The rate at which the response function decays is found to be 1.1783 and quite high. It is suggested that aggressive trading on a wide range of securities be encouraged as this will increase market depth and hence reduce volatility.