OIL PRICE VOLATILITY AND STOCK MARKET RETURN: EVIDENCE FROM NIGERIA.

Abstract

Oil price volatility and stock market has been a debated phenomenon among various scholars. This is due to the important of these two to a country's economic activities. However, oil price volatility across different sectors varies, due to the uniqueness of each sector in terms of their operations, rules and regulations and policies guiding them. Against these backdrops, this study seeks to investigate the oil price volatility effects on the sector stock market return. The specific objectives are to: (i) examine oil price volatility on banking sector stock returns in Nigeria; and (ii) examine the oil price volatility of oil price on the oil and gas sector return in Nigeria. The study made use of daily secondary data sourced from Nigeria stock exchange and the Energy Information Administration (EIA), Spanning from 2008 to 2018. Exponential Generalized Autoregressive conditional Heteroscedasticity model was used to examine the volatility of oil price on the two sector returns. The result revealed that oil price volatility is statistically significant at 5% level in influencing banking sector stock returns and the oil & gas sector returns. Also, the study found out that there is presence of positive and significant information asymmetry in the oil and gas sector, such that good news in the oil price markets has more propensity of increasing oil and gas sector return volatility than bad news. While, there is presence of negative and significant information asymmetry, which implies that bad news in the oil price markets has more propensity of increasing banking sector return volatility than good news. Based on the findings, the study recommends that management of listed oil and gas companies in stock market should closely monitor the exposure of their companies to the oil price fluctuation by diversifying their investment. While banks should tie their bank capitalization to oil price shocks, in order to mitigate procyclical bank lending and allow banks to use their capital cushions created during boom periods.