Irrational Investing in a Risky Nigerian Equity Market

International Journal of Economics and Management Studies
© 2020 by SSRG - IJEMS Journal
Volume 7 Issue 1
Year of Publication : 2020
Authors : Omokehinde , Joshua Odutola , Olurin, Enitan Rotimi
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How to Cite?

Omokehinde , Joshua Odutola , Olurin, Enitan Rotimi, "Irrational Investing in a Risky Nigerian Equity Market," SSRG International Journal of Economics and Management Studies, vol. 7,  no. 1, pp. 53-65, 2020. Crossref, https://doi.org/10.14445/23939125/IJEMS-V7I1P108

Abstract:

The paper investigates the irrational behavior of investors in therisky Nigerian equity market from January 4, 2014, to September3, 2019, using: descriptive and diagnostic statistics to test the marketbehavior; Jensen ALPHA, CAPM, Sortino, Shapre,  Treynor,and Fama'sreturn decomposition as standard tools to evaluate the irrational investing behavior of investors in the Nigerian equity market. The minimum acceptable return or risk-free rate stood at 12.76% during the period. The target market and portfolio returns were miscalebrated, which resulted in negative outcomes. The findings revealed that the excess of market and portfolio returns over risk-free were generally negative. The equity investment was risky as market and portfolio risks were grossly higher than their returns. The market return was volatile and did not behave normally as its kurtosis and skewness varied from the normal zero and 3.0 standards. The decomposition of the market and portfolio returns revealed that the systematic and unsystematic risks negatively influenced the risk-free to the extent that their total returns suffered losses that the selection opportunities could not remedy. The Treynor, Sharpe, and Jensen ratios were negative for the market and the portfolios. Jensen's Alpha is negative for both the market and the portfolios, which indicated that the risk-adjusted performance of the portfolios was not attractive. The CAPM indicates that the risk premium was negative for all the portfolios as the market return is lower than the risk-free rate. The Sortino ratio was also negative, and the average downside risk to total risk stood at 84.22%, indicating high downside volatility, meaning that for every N1.0 investment in the equity market, the probability of loss was lost 84.22kobo and 15.78kobo gain. It also attests that risk-averse investors were better than risk-seeking investors in the Nigerian equity market. The paper concluded that investors in the Nigerian equity marketbehaved irrationally and recommended that they avoid taking additional risksunless the risk premium is adequately compensatory for the degree of risk-taking.

Keywords:

Irrational investing, risk premium, minimum acceptable Return, Systematic Risk, Unsystematic risk, Downside risk.

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