What is it about?

What are the risk characteristics of an investor that holds a portfolio that has exposure to changes in crude oil prices and changes in returns within the Nigerian Stock Exchange (NSE)? If the investor holds the entire market portfolio, empirical results show an increase in the risk of the oil portfolio induces the investor to shirk risk within the stock market. If the investor holds a portfolio consisting of stocks in Obrimah, Alabi, and Ugo-Harry (2015) - the OAH Portfolio, the investor accepts any increases in risk within stock markets induced by increases in the risk of the oil portfolio in exchange for an increase in stock returns. These findings provide evidence that the investor that holds the OAH portfolio likely differs from the investor that holds the entire market portfolio.

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Why is it important?

Empirical results show the risk characteristics of the market portfolio of the Nigerian Stock Exchange (NSE) remain somewhat of a puzzle. The finding that increases in oil price risk do not have any effect on returns within the NSE unless they affect investors' risk appetites (evidence of absence of a demand effect), validates the expectation that demand for goods and services are relatively inelastic in relation to oil prices within oil producing countries.


This study provides evidence that skewness preference is utilized to hedge against downside risk, as opposed to the conventional expectation that it is utilized in taking advantage of extreme positive returns during periods with relatively decent returns. Stated somewhat differently, the results show skewness preference is more likely to be displayed during periods within which the probability of a loss on investments is relatively high, as opposed to periods within which the probability of a loss is relatively low. This property of skewness is deserving of additional theoretical or empirical scrutiny.

Dr Oghenovo A Obrimah
Fisk University

Read the Original

This page is a summary of: Crude Oil Prices, Risk Preferences, and Intertemporal Variation in Market Expected Returns: Empirical Evidence from the Nigerian Stock Exchange (NSE), SSRN Electronic Journal, January 2015, Elsevier,
DOI: 10.2139/ssrn.2671166.
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