DETERMINING THE STATISTICAL FACTORS AND FACTOR PREMIA IN THE NIGERIAN STOCK MARKET

Abstract

Factor model is a very useful and popular model in finance. In this project, the study empirically investigates the use of statistical factor analysis to determine factors affecting the returns in some sections of the Nigerian Stock Exchange and the macroeconomic variables that affect the stock returns during the years between 2008- 2012 for the Nigerian Stock Exchange (NSE). The Arbitrage Pricing Theory (APT) modeling framework is conducted using Statistical factor model. A total of thirty stocks which cut across difference sectors of the stock market were used. The monthly returns were obtained by continuous compounding of daily returns calculated from daily prices list for this period. This was used as input into the model. Seven unobservable factors were identified for the market and the loadings of the stocks on these factors were determined. The loading were used to estimate factor premium for each factor. A return-generality model was constructed using the factor premium. This model reflects what investors will expect for taking one unit of risk represented by each factor.