Robust Application of the Arbitrage Pricing Theory and the Test for Volatility in the Stock Market: Evidence from Nigeria

Dada, Samuel Obafemi, Kolapo, Funsho Tajudeen, Mokuolu, Joseph Oluseye, Alabi, Kehinde Miracle


This study examined the presence of the arbitrage pricing theory as well as volatility in the Nigerian stock market between 1986 and 2018. The study used stock returns as the dependent variable and also used oil price, exchange rate, inflation rate, interest rate, industrial output and real gross domestic product as independent variables. The classical Ordinary Least Square revealed that industrial output has positive effect on stock returns in the short run while the ARDL revealed that inflation has a negative effect on stock returns in the long run. Also, the ARCH and GARCH technique revealed that volatility is evidently high and persistent while the Granger Causality test revealed a unidirectional causality running from inflation and interest rates to stock returns and a bi-directional causal relationship between exchange rate and stock returns. Therefore, it can be concluded that the APT is valid in the Nigerian stock market. Hence, it was recommended that short term investors should pay more attention to the industrial output as diversification to other sectors like agriculture is highly encouraged. Also, the government should adopt policies such as substantial tax reliefs, grants and import substitution strategies to boost industrial output to ensure substantial stock returns in the short run. Invariably, such attempt to boost industrial output will increase competition and efficiency and reduce cost in the economy, coupled with other strategies such as floor and ceilings of macroeconomic rates, inflation will be reduced and become relatively stable to keep stock returns attractive.

Keywords: Asset Pricing, Arbitrage Pricing, Stock Returns, Macroeconomic Volatility

JEL Classification Codes: G1, O4, E3, E6

DOI: 10.7176/RJFA/12-4-01

Publication date: February 28th 2021

Full Text: PDF
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