INVESTIGATING STYLIZED FACTS OF ASSET RETURNS IN AN EMERGING STOCK MARKET IN THE PRESENCE OF GAUSSIAN ERRORS

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INVESTIGATING STYLIZED FACTS OF ASSET RETURNS IN AN EMERGING STOCK MARKET IN THE PRESENCE OF GAUSSIAN ERRORS

ABSTRACT

This paper models the volatility of asset returns that produces several well-documented stylized facts. The

Guinness bottling Company Plc daily closing share prices of the Nigerian stock exchange is used as proxy for Nigerian stock market. The data used for the study covers the period 1/02/1995 to 24/11/2014. The study employed Augmented Dickey-Fuller (ADF) unit root test for stationarity and mean reverting properties of returns while the volatility of asset returns was modeled using symmetric standard GARCH (1,1), asymmetric TGARCH (1,1) and PGARCH (1,1) models with Gaussian errors. Results of the unit root test indicate that the returns are stationary and mean reverting. The standard GARCH (1,1) model showed evidence of volatility clustering and mean reversion in Nigerian stock market. The conditional volatility was found to be quite persistence. The estimated asymmetric TGARCH (1,1) and PGARCH (1,1) models produced supportive evidence to the existence of asymmetry and leverage effects in Nigerian stock market. The study also found that the log returns are non-Gaussian, leptokurtic, fat-tailed and serially uncorrelated. The study therefore concludes that the well-documented stylized facts found in advanced and developed markets are also present in emerging stock markets like Nigeria and recommends that both local and foreign traders and investors should invest heavily in Guinness Plc as it has stable and mean reverting asset returns which are less risky.

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