Examining Weak-Form Efficiency and the Dynamics of Stock Return Volatility in Nigeria

Abstract

This study examined the weak-form efficiency and stock return volatility of the Nigerian Exchange Group (NGX) by analyzing daily closing prices of the All-Share Index (ASI) from May 18, 2017, to June 6th, 2024. Utilizing statistical tests such as Descriptive Statistics, Unit tests, Autocorrelation test, Pairwise Granger Causality test, Ordinary Least Square test, Normality/Random Walk test, Variance Ratio test and ARCH-GARCH models, the research assessed the predictability of stock returns. Results of the analysis revealed that Nigerian stock market did not follow the random walk theory (weak form inefficient), hence investors cannot use the past data about the markets to predict their outcome. ARCH-GARCH models’ results showed that Nigerian stock market exhibited property of stock returns distribution known as volatility clustering or volatility pooling. The persistence parameter found that shocks to the conditional variance is persistent in the Nigerian stock market. Asymmetric parameter results showed that Nigerian stock market contradicts the leverage effect theory, hence good news create more volatility than bad news of the same magnitude, within the scope of the study. Therefore, the research suggests among others that since the Nigerian capital market do not follow random walk or is inefficient at weak form, investors and other economic agents are advised to be proactive when evaluating the values of securities.