Volatility Modelling of Stock Returns of Selected Nigerian Oil and Gas Companies

Abstract

Modelling volatility asset returns is a well-researched concept in financial statistics, given its significance to investment analysts, economists, risk-averse investors, policymakers and other relevant stakeholders to underpin the market and the general economic performance and resilience to shocks, domestically and internationally. Thus, this study fits an appropriate ARCH/GARCH family model to daily stock returns volatility of each of the selected five most traded assets of the oil and gas marketing companies on the Nigerian stock exchange (NSE), using daily closing prices from January 1, 2005, to December 31, 2020. First-order symmetric and asymmetric volatility models with the Normal, Student’s t, Skewed Student’s t and generalized error distributions (GED) were fitted to select the best model with the most appropriate error distribution using appropriate model selection criteri EGARCH (1,1) with GEDs was found to be the best-fitted models based on the Akaike Information Criterion (AIC). The results indicated the presence of a leverage effect in the series and how the volatility reacts to good news as against bad news implying that positive shock has a higher impact on the returns of the respective companies. Based on the findings it is recommended that, for enhanced precision, GARCH family models with appropriate error distribution be applied in underpinning assets volatility, which in turn would help to better understand the nature of inherent shocks characterizing asset volatility of the respective companies. With such knowledge, appropriate investment decisions are made to guide risk-averse investors in their investments.