How Relevant Is the Capital Asset Pricing Model (CAPM) for Tests of Market Efficiency on the Nigerian Stock Exchange?

Oghenovo A. Obrimah, Jacob Alabi and Blessing Ugo-Harry

African Development Review, 2015, vol. 27, issue 3, 262-273

Abstract: type="main" xml:lang="en">

We find an asset pricing model which consists of the market portfolio, the market skewness or co-skewness factors, and portfolio idiosyncratic volatility factor best explains portfolio risk-return trade-offs on the Nigerian Stock Exchange (NSE), indicating this model is appropriate for studies of semi-strong form efficiency of the Nigerian Stock Market. Our finding that an asset pricing model which consists of the market portfolio alone tends to consistently understate portfolio risk indicates this conventional one-factor specification of the CAPM is inappropriate for tests of the efficiency of the Nigerian Stock Market. With respect to the effects of non-synchronous trading of stocks on portfolio risk-return trade-offs, while the presence of non-synchronous trading induces greater diversification benefits for investors, we find it simultaneously results in a higher price for market risk; that is, higher levels of risk aversion. Our findings demonstrate preference for market skewness or co-skewness can be a risk mitigating response to anticipated adverse effects of changes in the risk of the market portfolio on portfolio returns.

Date: 2015
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