Effect of Volatility Transmission on Domestic Stock Returns: Evidence from Nigeria

Abstract

This study utilizes the structural unrestricted vector auto-regressive (SVAR) model to examine the intertwining relationship between oil price volatility and S&P 500 returns on stock returns in Nigeria.The stochastic properties of the series considered in the model were analyzed using the sensitivity and innovation criteria. The result from this study confirms that US inflationary spillover exert a negative impact on the domestic market in Nigeria. Economic downturn arising from dwindling foreign global economic activity raises uncertainty about the stability of the markets and thus increases stock market volatility. This research has two important connotations. First, that domestic stock returns are vulnerably exposed to volatility from inflationary spillover and energy prices and secondly, international portfolio diversification and trading decision by foreign investors into the local markets could result in decrease stock returns if proper effective hedging strategies are not adopted, particularly, during crisis periods.