Abstract
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 28 th 2021
Highlights
The financial system is the impetus of every economy, this system encompasses regulatory institutions and other players within the economy especially the financial market and the stock market
The short run oriented result as seen in the table 4.1 above shows that the presence of the Arbitrage Pricing Theory (APT) in the Nigerian stock market is considerably valid as the only macroeconomic variable that affects stock returns due to its significance is the industrial output in the short run
Discussion of Findings and Implications This study examined the validity of the arbitrage pricing model and the presence of volatility in the macroeconomic environment as it affects stock returns
Summary
The APT was postulated by Ross (1976) as an improvement on the Capital Asset Pricing Model (CAPM) as hypothesized by Sharpe (1964) and advanced by Lintner (1965) and Mossin (1966). The study employed all share index as the predictant and made use of money supply, index of industrial output, exchange rate and oil price as factor predictors coupled with the use of descriptive statistics and the Vector Error Correction Modelling as the estimating technique, it was revealed that the APT is valid and strongly applicable in Nigeria as oil price was found as a major determining factor of stock returns. The study made use of stock returns as the dependent variable and used market capitalization, lending rate, deposit rate, interest rate spread, inflation rate, exchange rate, oil price and treasury bill rate as independent variables coupled with the use of descriptive statistics and the Error Correction modelling technique, it was revealed that the APT is valid in the Nigerian capital market. The study applied the Engle Granger causality technique to examine the causal relationship between macroeconomic variables and stock returns
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