Equity Premium Puzzle in the Nigerian Capital Market

Abstract

Abstract

This study empirically investigates whether the equity premium puzzle (EPP) exists in the Nigerian Capital Market, using evidence from eight major sectors, consisting of agriculture, conglomerates, construction and real estate, consumer goods, financial services, health care, industrial goods, oil and gas, examined over the period 2000 to 2019 due to available data. Equity stock was used as risky asset, while treasury bills were used as risk-free assets (riskless asset). Consumption growth was included being a core intervening variable in inter- temporal and utility based asset price modelling. Employing descriptive statistics, correlation analysis, and, joint system-GMM estimation approach, the empirical results show no evidence of EPP in Nigeria, as the treasury bill rate (return on risk-free asset) outperformed the return on equity stock (risky asset) throughout the period and cross-section; and the risk aversion  found to be statistically insignificant, even though it was high, implying a highly risk averse investment environment, but with no evidence of EPP in the Nigerian Capital Market. Further evidence shows an insignificant relationship between risk and return; a further validation of no evidence of EPP in the Nigerian Capital Market. Consumption growth is positively and significantly related to asset return and positively correlated with risks. Against the backdrop of the foregoing findings, continuous empirical investigation is important in the subject matter, given the unfolding dynamics, and volatile nature of the Nigerian economy and capital market. Also, a strong regulatory framework and institutional mechanisms aimed at achieving enhanced optimal investment decisions and operations, efficiency, penetration, deepening and development of the Nigerian Capital Market are also important recommendations.

Keywords: Equity Premium Puzzle, Treasury Bills, Stock Returns, NGX, System GMM