Journal of Finance and Economics
ISSN (Print): 2328-7284 ISSN (Online): 2328-7276 Website: Editor-in-chief: Suman Banerjee
Open Access
Journal Browser
Journal of Finance and Economics. 2019, 7(1), 1-13
DOI: 10.12691/jfe-7-1-1
Open AccessArticle

Volatility Clustering, Leverage Effects and Risk-Return Trade-Off in the Nigerian Stock Market

Wilson E. Herbert1, , Georgina O. Ugwuanyi2 and Ernest I. Nwaocha2

1Department of Banking & Finance, Faculty of Management Sciences, Federal University, Otuoke, Nigeria

2Department of Banking & Finance, College of Management Sciences, Michael Okpara University of Agriculture, Umudike, Nigeria

Pub. Date: December 24, 2018

Cite this paper:
Wilson E. Herbert, Georgina O. Ugwuanyi and Ernest I. Nwaocha. Volatility Clustering, Leverage Effects and Risk-Return Trade-Off in the Nigerian Stock Market. Journal of Finance and Economics. 2019; 7(1):1-13. doi: 10.12691/jfe-7-1-1


The configurations of volatility and leverage effect in financial markets play important roles in portfolio management, especially in asset allocation, asset pricing, portfolio selection, portfolio diversification, and risk management. This paper examines the phenomenon of volatility clustering and leverage effect (asymmetry) in stock returns of the Nigerian stock market, using the daily All Shares Index of the Nigerian Stock Exchange during the 7-year period, covering 4th January 2010 through 2nd August 2016. Descriptive statistics, Generalized Autoregressive Conditional Heteroscedasticity (GARCH (1.1) and Glosten, Jagannathan and Runkle Autoregressive Conditional Heteroscedasticity (GJR-GARCH (1.1) were employed in the data estimation. The results affirm the presence of volatility clustering, persistent clustering and significant leverage effects of stock returns in the Nigerian stock market. The findings have policy implications for the regulation and policy expediency of measures that progressively checkmate the patterns of volatility in the Nigerian stock market as well as control negative news (such as insecurity, political instability, and macroeconomic policy inconsistency) which largely increase the level of market uncertainty and investors’ exposure to risks in the market.

asymmetric volatility GARCH effect leverage effect persistent clustering volatility clustering

Creative CommonsThis work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit


[1]  Modigliani, F. & Miller, M. H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. American Economic Review, 48: 231-297.
[2]  Sharpe, W. F. (1964). Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. Journal of Finance, 19(3), 425-442.
[3]  Lintner, J. (1965). The Valuation of Risky Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets. Review of Economics and Statistics, 47, 13-37.
[4]  Black, F. (1972). Capital Market Equilibrium with Restricted Borrowing. Journal of Business, 45(3), 444-455.
[5]  Black, F. & Scholes, M. (1973). The Pricing of Options and Corporate Liabilities. The Journal of Political Economy, 81(3), 637-654.
[6]  Girard, E .and Biswas, R. (2007). Trading volume and market volatility: Developed versus Emerging markets. Financial Review, 42(1), 429-459.
[7]  Gaspar, J-M. & Massa, M. (2006). Idiosyncratic Volatility and Product Market Competition. The Journal of Business. 79(6), 3125-3152.
[8]  Merton, R. C. (1987). A simple model of capital market equilibrium with incomplete information. Journal of Finance, 42(3), 483-510.
[9]  Tripathy, T. & Gil-Alana, L.A. (2010). Suitability of Volatility Models for Forecasting Stock Market Returns: A Study on the Indian National Stock Exchange. American Journal of Applied Sciences, 7(11), 1487-1494.
[10]  Engle, F.R., & Ng, V.K. (1993). Measuring and testing the impact of news on volatility. Journal of Finance, 48, 1749-1778.
[11]  Cutler, D., Poterba, J. & Summers, L. (1989). What moves stock prices? Journal of Portfolio Management, 15, 4-11.
[12]  Mandelbrot, B. B. (1963). The Variation of Certain Speculative Prices. The Journal of Business, 36(4), 394-419.
[13]  Schwert, G. W. & Seguin, P. J. (1990). Heteroscedasticity in Stock Returns. Journal of Finance, 45, 1129-1155.
[14]  Brooks, C. (2014). Introductory Econometrics for Finance, 3rd ed. Cambridge: Cambridge University Press.
[15]  Zabiulla, W. (2015). Volatility Clustering and Leverage Effect in the Indian Forex Market. Global Business Review, 16(5), 785-799.
[16]  Harvey, C. R. (1995). Predictable Risk and Returns in Emerging Markets. The Review of Financial Studies, 8, 773-816.
[17]  Aggarwal, R., Inclan, C. & Leal, R. (1999). Volatility in Emerging Stock Markets. Journal of Financial and Quantitative Analysis, 34, 33-55.
[18]  Bekaert, G. & Harvey, C. R. (1997). Emerging Equity Market Volatility. Journal of Financial Economics, 43, 29-77.
[19]  Bekaert, G. & Harvey, C. R. (2002). Research in emerging markets Finance: Looking to the future. Emerging Markets Review, 3, 429-448.
[20]  Bekaert, G. & Wu, G. (2000). Asymmetric Volatility and Risk in Equity Markets. The Review of Financial Studies 13, 1-42.
[21]  Black, F. (1976). Studies of stock price volatility changes, in: Proceedings of the 1976 Meeting of the Business and Economic Statistics Section, American Statistical Association, Washington DC., 177-181.
[22]  Christie, A. A. (1982). The Stochastic Behaviour of Common Stock Variances: Value, Leverage and Interest rate effects. Journal of Financial Economics, 10, 407-432.
[23]  Schwert, G. W. (1989). Why does market volatility change over time? Journal of Finance, 44(5), 1115-1153.
[24]  Braun, P., Nelson, D., & Sunier, A. (1995). Good news, Bad news, Volatility and Betas. Journal of Finance, 50(5), 1575-1603.
[25]  Goudarzi, H. & Ramanarayanan, C. S. (2011). Modelling asymmetric volatility in the Indian stock market. International Journal of Business and Management, 9(1), 242-288.
[26]  Ogden, J.P., Jen, F.C. & O’Connor, P.F. (2003). Advanced Corporate Finance: Policies and Strategies, Upper Saddle River, NJ: Prentice Hall.
[27]  Mishkin, F. S. (1995). Financial Markets, Institutions and Money, New York: HarperCollins College Publishers.
[28]  Mishkin, F. S. & Eakins, S. G. (2015). Financial Markets and Institutions, 8th Ed., Upper Saddle River, New Jersey: Pearson Education, Inc.
[29]  Christos, F. (2008). Modeling volatility using GARCH model: Evidences from Egypt and Israel. Middle East Financial Economics, Euro Journals Publishing Inc.
[30]  Officer, R. R. (1973). The variability of the market factor of New York Stock Exchange. Journal of Business 46, 434-453.
[31]  Merton, R. C. (1980). On estimating the expected return on the market: An exploratory investigation. Journal of Financial Economics, 8, 323-361.
[32]  Pindyck, R. S. (1984). Risk, inflation, and the stock market. American Economic Review, 74, 335-351.
[33]  Poterba, J. M. & Summers, L. H. (1986). The persistence of volatility and stock market fluctuations. American Economic Review, 76, 1142-1151.
[34]  French, K. R., Schwert, G. W. & Stambaugh, R. F. (1987). Expected stock returns and volatility. Journal of Financial Economics, 19, 3-29.
[35]  Abel, A. (1988). Stock prices under time-varying dividend risk: An exact solution in an infinite horizon general equilibrium model. Journal of Monetary Economics, 22, 375-393.
[36]  Bollerslev, T., Engle, F. R. & Wooldridge, J. M. (1988). A capital asset pricing model with time varying covariances. Journal of Political Economy, 96, 116-131.
[37]  Mascaro, A. & Meltzer, A. H. (1983), Long-and short-term interest rates in a risky world. Journal of Monetary Economics, 12, 485-518.
[38]  Lauterbach, B. (1989). Consumption volatility, production volatility, spot rate volatility and the returns on Treasury bills and bonds. Journal of Financial Economics, 24(1): 155-179.
[39]  Shiller, R. J. (1981a). Do stock prices move too much to be justified by subsequent changes in dividends. American Economic Review, 75, 421-436.
[40]  Shiller, R. J. (1981b). The use of volatility measures in assessing market efficiency. Journal of Finance, 36, 291-304.
[41]  Glosten, L. R., Jagannathan, R. & Runkle, D. E. (1993). On the relation between the expected value and volatility of nominal excess return on stocks. The Journal of Finance, 48(5), 1779-1801.
[42]  Almeida, D. & Hotta, L. K. (2014). The leverage effect and the asymmetry of the error distribution in GARCH-based models: The Case of Brazilian market-related series. Pesquisa Operacional (Brazilian Operations Research Society publication), 34(2), 237-250.
[43]  Figlewski, S. & Wang, X. (2000), Is the 'Leverage Effect' a Leverage Effect? Working paper series, Vol. 37, Salomon Center for the Study of Financial Institutions New York University.
[44]  Bollerslev, T., Engle, R. & Nelson D. (1994), ARCH models, in: Engle, R. & McFadden, D. (eds.) Handbook of Econometrics, Vol. 4, 1sted.
[45]  Adjasi, C. K.D. (2004). Stock Market Volatility in African Markets: The Case of the Ghana Stock Exchange. First African Finance Journal, July, Cape Town, South Africa.
[46]  Magnus, F. J. & Oteng-Abayie, E. F. (2006). Modelling and Forecasting Volatility of Returns on the Ghana Stock Exchange Using Garch Models. American Journal of Applied Sciences, 3(10), 2042-2048.
[47]  Adjasi, C., Harvey, S. K. & Agyapong, D. (2008). Effect of Exchange Rate Volatility on the Ghana Stock Exchange. African Journal of Accounting, Economics, Finance and Banking Research, 3(3), 28-47 [Accessed Sep 28 2018].
[48]  Coffie, W. (2015). Modelling and forecasting the conditional heteroscedasticity of stock returns using asymmetric models: Empirical evidence from Ghana and Nigeria. Journal of Accounting and Finance, 15(5), 109-123.
[49]  David, N. & Peter, W. M. (2016). Stock returns and volatility in an emerging equity market: Evidence from Kenya. European Scientific Journal, 12(4), 1857-7881.
[50]  Ogum, G., Beer, F. & Nouyrigat, G. (2005). Emerging Equity Market Volatility: An Empirical Investigation of Markets on Kenya and Nigeria. Journal of African Business, 6 (1/2), 139-154.
[51]  Wagala, A., Nassiuma, D. K., Islam, A. S. & Mwangi, J. W. (2012). Volatility modelling of the Nairobi Securities Exchange weekly returns using the arch-type models. International Journal of Applied Science and Technology, 2(3), 165-174.
[52]  Maqsood, A., Safdar, S., Shafi, R. & Lelit, N. J. (2017). Modeling stock market volatility using GARCH models: A case study of Nairobi Securities Exchange (NSE). Statistics, 7, 369-381.
[53]  Moyo, E., Waititu, A. G. & Ngunyi, A. (2018). Modelling the Effects of Trading Volume on Stock Return Volatility Using Conditional Heteroskedastic Models. Journal of Finance and Economics, 6(5), 193-200.
[54]  Ayele, A. W., Gabreyohannes, E. & Tesfay, Y. Y. (2017). Macroeconomic determinants of volatility for the gold price in Ethiopia: The Application of GARCH and EWMA Volatility models, Global Business Review. 18(2), 308-326.
[55]  Thorlie, M. A., Song, L., Wang, X. & Amin. M. (2014). Modelling exchange rate volatility using asymmetric GARCH models (evidence from Sierra Leone). International Journal of Science and Research (IJSR), 3(11): 1206-1214.
[56]  Ahmed, A. E. M. & Suliman, S. Z. (2011). Modeling Stock Market Volatility Using GARCH Models: Evidence From Sudan. International Journal of Business and Social Science, 2(23), 114-128.
[57]  Eskandar, T. (2005), Modeling and Forecasting Egyptian Stock Market Volatility Before and After Price Limits. The Economic Research Forum, Working Paper No. 0310, September.
[58]  Okpara, G. C. & Nwezeaku, N. C. (2009). Idiosyncratic risk and the cross-section of expected stock returns: Evidence from Nigeria. European Journal of Economics, Finance and Administrative Sciences, 17(2), 1-10.
[59]  Emenike, K. O. (2010). Modelling stock returns volatility in Nigeria using GARCH models, Munich Personal Paper Publications, No. 23432.
[60]  Onwukwe, C. E., Bassey, B. E. E. & Isaac, I. O. (2011). On modelling the volatility of Nigerian stock returns using GARCH models. Journal of Mathematics Research, 3(4), 14-29.
[61]  Adesina, K. S. (2013). Modelling stock market return volatility: GARCH evidence from Nigerian stock exchange. International Journal of Financial Management, 3(3), 37-46.
[62]  Atoi, N. V. (2014). Testing volatility in Nigerian stock market using GARCH models. CBN Journal of Applied Statistics, 5(2), 65-93.
[63]  Osazevbaru, H.O. (2014). Modelling Nigeria stock market news using TGARCH Model, International Journal of Development and Sustainability, 3(9): 1894-1903.
[64]  Auwal, U. (2017). Modelling Exchange Rates-Industrial Stock Returns nexus: A DCC-GARCH and MIDAS* Framework for Nigeria. A paper presented at the Nigerian Economic Society Conference, NICON Luxury Hotel, September 26-28, Abuja, Nigeria.
[65]  Batra, A. (2004). Stock return volatility patterns in India. Indian Working Paper No. 124, Indian Council for Research on International Economic Relations, New Delhi.
[66]  Poon, S. H. (2005). A Practical Guide to Forecasting Financial Market Volatility. West Sussex: John Wiley and Sons.
[67]  Poon, S. H., & Granger, C. (2003). Forecasting volatility in financial markets: A Review. Journal of Economic Literature, 41(2): 478-539.
[68]  Moustafa, A. A. (2011). Modelling and forecasting time varying stock return volatility in the Egyptian stock market. International Research Journal of Finance and Economics, 78, 96-113.
[69]  Levine, R. & Zervous, S. (1996). Stock market development and long run. World Bank Economic Review, 10(2), 323 – 339.
[70]  Nichol, E. & Dowling, M. (2014). Profitability and investment factors for UK asset pricing models. Economic Letters, 125(3), 364-366.
[71]  Beakert, G., Harvey, C. R. & Lundblad, C. T. (2001). Emerging equity markets and economic development. Journal of Development Economics, 66, 465-504.
[72]  Stulz, R. M. (1999). Globalization, corporate finance, and the cost of capital. Journal of Applied Corporate Finance, 12(3), 8-25.
[73]  Doidge, C., Karolyi, G. A. & Stulz, R. M. (2004). Why are foreign firms listed in the US worth more? Journal of Financial Economics, 71(2), 205-238.
[74]  Wang, J. (2007). Foreign equity trading and emerging market volatility: Evidence from Indonesia and Thailand, Journal of Development Economics, 84(2), 798-811.
[75]  Stiglitz, J. E. (1999). Reforming the global economic architecture: lessons from recent crises. Journal of Finance, 54(4), 1508-1522.
[76]  Bae, K. H., Chan, K., & Ng, A. (2004). Investibility and return volatility. Journal of Financial Economics, 71, 239-263.
[77]  Douma, S., George, R. & Kabir, R. (2006). Foreign and Domestic Ownership, Business Groups and Firm Performance: Evidence from a Large Emerging Market, Strategic Management Journal, 27(7), 637-657.
[78]  Wang, K. T. & Shailer, G. (2017). Does Ownership Identity Matter? A Meta-analysis of Research on Firm Financial Performance in Relation to Government versus Private Ownership. Abacus, 54(1), 1-35.
[79]  Rafagut, A. & Afzah, M. (2012). Impact of global financial crisis on stock markets: Evidence from Pakistan and India. Journal of Business Management and Economics, 7(4), 275-282.
[80]  Kim, E. H., & Singal, V. (2000). Stock market openings: Experience of emerging economics. The Journal of Business, 73(1), 25-66.
[81]  Xuan, V. V. (2015). Foreign ownership and stock return volatility: Evidence from Vietnam. Journal of Multinational Financial Management, 30(3), 101-109.
[82]  Li, D., Nguyen, Q. N., Pham, P. K., & Wei, S. X. (2011). Large foreign ownership and firm-level stock return volatility in emerging markets. Journal of Financial and Quantitative Analysis, 46(04), 1127-1155.
[83]  Sewell, M. (2011). Characterization of financial time series [Research Note RN/11/01, online]. University College London. [Accessed October 30, 2018].
[84]  Cont, R. (2001), Empirical Properties of Asset Returns: Stylized Facts and Statistical Issues. Quantitative Finance, 1, 223-236.
[85]  Chen, M.-Y. (2013). Financial Time Series and Their Characteristics. Accessed 15 October, 2018 via:
[86]  Menggen, C. (2015). Risk-return tradeoff in Chinese stock markets: Some recent evidence. International Journal of Emerging Markets, 10(3), 448-473.
[87]  Campbell, J. Y., Lo, A. W. & MacKinlay, A. C. (1997). The Econometrics of Financial Market, Press Princeton, New Jersey: Princeton University.
[88]  Engle, F. R. (1982). Autoregressive conditional heteroskedasticity with estimates of the variance of United Kingdom inflation. Econometrica, 50(4), 987-1007.
[89]  Bollerslev, T. (1986). Generalized autoregressive conditional heteroscedasticity, Journal of Econometrics, 31(1), 307-327.
[90]  Dutt, T. & Jenner, M. H. (2013). Stock return volatility, operating performance and stock returns: International evidence on drivers of the ‘low volatility’ anomaly. Journal of Banking & Finance 37(3), 999-1017.
[91]  Akter, N. & Nobi, A. (2018). Investigation of the Financial Stability of S&P 500 Using Realized Volatility and Stock Returns Distribution, Journal of Risk and Financial Management, 11(2), 1-10.
[92]  Njimante, G. F. (2012). An investigation into the volatility and stock returns: Evidence from South African stock exchange market. International Review Financial Journal, 17(1), 27-46.
[93]  Izz, E. N. A., Qasim, M. J. & Ahmed, M. A. (2013). Relationship between market volatility and trading volume: Evidence from Dubai stock exchange. International Journal of Business and Social Science, 4(16).
[94]  Griffin, M.; Nardari, F. & Stulz, R. M. (2007). Do investors trade more when stocks have performed well? Evidence from 46 countries. Review of Financial Studies, 20(3), 905-951.
[95]  Wagner, H. & Marsh, T. A. (2005). Surprise volume and heteroscedasticity in equity market returns. Quantitative Finance Journal, 5(2), 153-168.
[96]  Paul, R. K. (2006). Autoregressive conditional heteroscedasticity (ARCH) family of models for describing volatility. New Delhi: New Delhi University Press.
[97]  Campbell, B.C. (2001). No news is good news; An asymmetric model of changing volatility in stock returns. Journal of Financial Economics, 31(1), 201-318.
[98]  Kim, D. & Kon, S. I. (1994). Alternative models for conditional heteroskedasticity of stock returns. Journal of Business, 69(1), 563-598.
[99]  Richard, A. (1996). Volatility and predictability in national market; how do emerging and mature markets differ. International Review of Financial Analysis, 17(1), 27-46.
[100]  Baillie, B. and Gernnaro, D. (1999). Stock returns and volatility. Journal of Financial and Quantitative Analysis, 25(1), 203-214.
[101]  Wang, P. & Liv, A. (2005). Stock return volatility and trading volumes: Evidence from the Chinese stock market. Journal of Chinese Economic and Business Studies, 3(1), 39-54.
[102]  Bai, X., Russell, J. R. & Tiao, G. C. (2003). Kurtosis of GARCH and Stochastic Volatility Models with Non-Normal Innovations. Journal of Econometrics, 114(2), 349-360.
[103]  Long, V. T. (2008). Empirical analysis of stock returns volatility with regime change using GARCH model: The Case of Vietnam. Vietnam Development Forum-Tokyo Presentation, January.
[104]  Arora, R. K., Das, H. & Jain, K. P. (2009). Stock returns and volatility: Evidence from selected emerging markets. Review of Pacific Basin Financial Markets and Policies. 12(4), 221-238.
[105]  Fang, K.; Wu, J. & Nguyon, C. (2015). The risk-return trade-off in a liberalized emerging stock market: Evidence from Vietnam. Journal of Multinational Financial Management. 29(1), 101-115.
[106]  Cai, W.; Chen, J.; Hong, J. & Jiang, F. (2015). Forecasting Chinese stock market volatility with economic variables. Emerging Markets Journal of Finance and Trade, 53(3).
[107]  Okicic, J. (2015). An empirical analysis of stock returns and volatility: The case of stock market from central, Eastern Europe and South East. European Journals of Economics and Business, 9(1).
[108]  Sungh, P. R. & Kishor, N. (2016). Stock return volatility effect: study of BRICS countries. Transactional Corporation Review, Vivekananda Institute of Professional Studies, 6(4), 406-418.
[109]  Anusakumar, A.S., Ali, R., & Wooi, C. H. (2017). The effect of investor sentiment on stock returns: insight from emerging Asian markets. Journal of Accounting and Finance, 13(1), 159-178.
[110]  Aziz, T. & Ansari, A. V. (2017). Idiosyncratic volatility and stock returns: Indian evidence. Cogent Economics and Finance. Journal, 5, 1420998.
[111]  Lucey, B. M. (2018). Asymmetric linkages among the fear index and emerging market volatility indices, Emerging Market Review, Jan. 2018, 2(1).
[112]  Badshah, I., Bekiros, S., Lucey, B. M., & Uddin, G. S. (2018). Asymmetric linkages among the fear index and emerging market volatility indices. Emerging Market Review, (Online 3 May 2018).
[113]  Gujarati, D. N. (2003). Basic Econometrics, 4th Edition, New York: McGraw-Hill/Irwin.
[114]  George, D., & Mallery, M. (2010). SPSS for Windows Step by Step: A Simple Guide and Reference, 17.0 update (10a ed.) Boston: Pearson.
[115]  Bollerslev, T. & Engle, R. F. (1993). Common persistence in conditional variance, Econometrica, 61, 167-186.
[116]  Herbert, W. E., Nwude, E. C. & Onyilo, F. (2017). The Application of the Capital Asset Pricing Model (CAPM) in the Nigerian Chemicals and Paints Industrial Sector. European Journal of Accounting, Auditing and Finance Research, 5(8), 12-32.
[117]  The Financial Times (2018). Why market volatility is growing more intense.
[118]  Engle, R. F. & Bollerslev, T. (1986). Modelling the persistence of conditional variance. Econometric Reviews, 5: 1-50.