Risk-Return Relationship in the Nigerian Stock Market: Comparative between Fama-French Five-Factor Model and Higher Moment Fama-French Five-Factor Model

Abstract

The study looked at the relationship between risk and return in the Nigerian stock market using Fama-French five-factor model and Higher Moment Fama-French five-factor model. The employed 90 companies’ stocks that are frequently traded out of the sample size of 113 companies’ stocks. The monthly stock prices, market index, risk-free rate (which was substituted with the rate on Treasury bills), ownership shareholdings, market capitalization, book value of equity, earnings before interest and taxes, and total assets were the data used in this study. The entire sample period covered from 2005-2020. The data was extracted from the Nigerian Group of Exchange (NGX) website, the Central Bank of Nigeria (CBN) website, and the Standard and Poor (S&P) database. The Fama-MacBeth two-step regression method was employed. It was found that systematic risk has significant negative effect on return while unsystematic risk has significant positive effect on return. The study concluded that the long standing view of hypothesised positive relationship between risk and return does not hold in the Nigerian stock market and the assumption that market risk is the only determinant of return is invalidated. Also, systematic coskewness risk is an important risk factor in the Nigerian stock market and higher moment FF5F model and CoFF5F model is superior to FF5F model. The study recommended that the investors should focused on how their investment return co-move with other dimension of risk such as unsystematic risk, systematic cokewness risk, systematic cokurtosis risk and non-market risk apart from the systematic risk.