Volatility Modelling of the Impact of Post Covid-19 Pandemic on Nigeria Stock Exchange

Abstract

This study investigated the impact of the post-COVID-19 period on the volatility behaviour of the Nigerian Stock Exchange (NSE) All-Share Index using monthly data from January 2018 to December 2023. The study aimed to examine volatility dynamics, assess volatility persistence, and forecast future market behaviour during the recovery phase following the COVID-19 pandemic. Logarithmic returns were computed from the NSE All-Share Index data and analysed using descriptive statistics, the Augmented Dickey-Fuller (ADF) unit root test, ARMA modelling, the ARCH-LM test, and GARCH-family models. Model estimation and forecasting were conducted using R statistical software. The results revealed that the original series was non-stationary but became stationary after logarithmic differencing. The ARCH-LM test confirmed the presence of significant ARCH effects, indicating volatility clustering and justifying the use of GARCH models. The initial Gaussian GARCH(1,1) model exhibited signs of misspecification and non-normal residuals; consequently, a Student-t error distribution was adopted to better capture the heavy-tailed nature of stock returns. The estimated model revealed substantial volatility persistence, suggesting that market shocks have prolonged effects before gradually dissipating. Furthermore, conditional volatility exhibited a declining trend throughout the study period, indicating that the Nigerian stock market progressively adjusted to pandemic-induced disruptions and moved toward greater stability. Forecast results showed a relatively flat, mean-reverting volatility pattern, suggesting that future market volatility is likely to converge toward its long-run equilibrium level. The study concludes that the Nigerian stock market has largely recovered from the volatility associated with the COVID-19 pandemic and entered a phase of relative stability. These findings provide useful insights for policymakers, investors, and financial institutions in designing strategies to strengthen market resilience and manage future financial risks.