Heteroskedasticity of Market Return: A Look at the All Nigerian Stock Exchange Index Time Series

required towards understanding the behaviour of volatility and by extension, price generating dynamics in the market. Of the deluge of models that have emerged to explain and predict market behaviour, the pre-dominant ones are undoubtedly the unconditional mean-variance frameworks typified by the CAPM Class of models. Unfortunately these models have manifested critical defects in theory and evidence. This paper follows the lead of Engle (1982), Bollerslev (1986), and Nelson (1991) to model the All Nigerian Stock Exchange Index times series between January 2004 and December 2007 within the AR(3) EGARCH (1, 1) in-Mean framework with a view to explain those stylized facts of volatility like asymmetry, persistence, clustering, positive risk premium etc commonly associated with other advanced and rapidly developing markets. Using 978 observations comprised in the weekly sample Index Return, the exponential model which tended to be white noise was found to be substantially well specified, and able to explain some of the puzzles thrown up by the normative frameworks as in Amah (2004). The research result shows that the market exhibited the phenomenon of mean/volatility persistence, a symptom typically associated with market inefficiency. Basically the auto-regressive scheme of the first and second moments provided the right basis to predict future behaviour of returns. There seems therefore to be a predictable component in the conditional variance over time such that increases in present volatility leads to subsequent increases in future volatility. This also suggests that the market has what analysts have come to know as long memory and slow auto-correlation decay rate which contradicts the intuition behind random walk hypothesis. Finally research findings suggest that the market did not exhibit ‘leverage effects’, a phenomenon of volatility asymmetry found in most advanced markets.