Moderating the effect of short selling strategy on the relationship between the risk and return in the Nigerian stock market
Abstract
The study looked at how shot selling affected the link between risk and return in the Nigerian stock market. Secondary data was gathered from sources such as Standard & Poor's, NGX websites, and the CBN statistical bulletin. Fama-French Two-Step regression approach was used and it was found that short selling had a negative and statistically negligible influence on returns, according to the study. However, when used as a moderator, it lowered systematic risk slightly while improving the link between systematic risk and return in the Nigerian stock market. Short selling also lowered unsystematic risk and enhanced the link between unsystematic risk and return across multiple models. Unsystematic risk had a favorable and large impact on the Nigerian stock market's predicted returns. Unsystematic risk influenced predicted returns in the Nigerian stock market in a positive and significant way. According to the research, a short-selling investing technique can be implemented efficiently in the Nigerian stock market to maximize rewards while limiting risk. Unsystematic risk is not always diversified, but it demands a premium in the Nigerian stock market, since investors that take such risks are rewarded. The study advises investors to pay particular attention to how their investment returns correspond with several types of risk, such as unsystematic and non-market hazards, in addition to systematic risk. Implementing a well-managed short-selling investing plan can boost stock market performance.
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Alajekwu, U. B., Obialor, M. C., & Okoro, C. O. (2017). Effect of investor sentiment on future returns in the Nigerian stock market. Annals Spiru Haret University Economic Series,2, 103-126. https://doi.org/10.26458/1726
Bello, M. A. (2016). Market reaction and insider trading around the announcements of equity Issues: Evidence from Nigeria. International Journal of Accounting, Finance and Risk Management, 1(1), 25-32. https://doi.org/10.11648/j.ijafrm.20160101.14
Bohl, M. T., Reher, G., & Wilfling, B. (2016). Short selling constraints and stock returns volatility: Empirical evidence from the German stock market. Economic Modelling,58, 159–166. https://doi.org/10.1016/j.econmod.2016.05.025
Cacares, Moreno & Rodrigues, 2015
Chague, F., De-Losso R., & Giovannetti, B. (2019). The short-selling skill of institutions and Individuals. Journal of Banking and Finance, 101, 77–91. https://doi.org/10.1016/j.jbankfin.2019.02.003
Cho, Y., S., & Kwak, Y. (2017). Information contents of short selling restriction and stock lending and borrowing transactions. American Journal of Economics and Business Administration, 9 (2), 27-37. https//doi.org/10.3844/ajebasp.2017.27.37
Deshmukh, S., Gamble, K. J., & Howe, K. M. (2017). Informed short selling around seasoned equity offerings (SEO) announcements. Journal of Corporate Finance, 46, 121–138. https://doi.org/10.1016/j.jcorpfin.2017.05.013
Duchêne, S., Guerci, E., Hanaki, N., & Noussair, C. N. (2019). The effect of short selling and borrowing on market prices and traders’ behavior. Journal of Economic Dynamics and Control, 107, 1-23. https://doi.org/10.1016/j.jedc.2019.103734
Ejem, C. A., Ogbonna, U. G., & Ogbulu, O. M. (2020). Dynamic interactions of Nigerian stock market and macroeconomic variables. Research Journal of Finance and Accounting, 11(8), 33-49. https://doi.org/10.7176/RJFA/11-8-04
Ekundayo, V., Adeoye, A., & Lalude, O. M. (2020). Insider trading under the Nigerian Legal Framework. International Company and Commercial Law Review, 6, 372-380.
Emmanuel, T. A., & Ahmed, A. T. (2020). Effect of investors’ sentiment on stock returns in Nigeria (1990-2017). International Journal of Research in Commerce and Management Studies, 2(1), 21-32.
Evbayiro-Osagie, E. I., & Chijuka, M. I. (2021). Psychological factors and investment decisions in the Nigeria Capital Market. Oradea Journal of Business and Economics, 6(1), 33-41. https://doi.org/10.47535/1991ojbe119
Fama, E., F., & French, K. R. (2015). A five-factor asset pricing model. Journal of Financial Economics, 116, (1), 1-22.
Gbadebo, A. O. & Oyedeko, Y. O. (2021). Economic risk factors and expected return: Evidence from upside and downside market conditions in Nigeria. Theoretical and Empirical Researches in Urban Management, 16(2), 72-88.
Gbadebo, A. O. & Oyedeko, Y. O. (2022). Effect of short selling on risk and return in the Nigerian stock market. Journal of Public Administration, Finance and Law, 26, 99-114. https://doi.org/10.47743/jopafl-2022-26-10
Goyenko, R., & Schultz, P. (2020). Volatility and the cross-section of equity returns: The role of short-selling constraints. http://dx.doi.org/10.2139/ssrn.3567800
Hackney, J., Henry, T. R., & Koski, J. L. (2020). Arbitrage vs. informed short selling: Evidence from convertible bond issuers. Journal of Corporate Finance, 65, 1-22. http://dx.doi.org/10.2139/ssrn.3137226
Hendershott, T., Kozhan, R., & Raman, V. (2019). Short selling and price discovery in Corporate bonds. Journal of Financial and Quantitative Analysis, 1-39. https//doi.org/10.1017/S0022109018001539
Hu, T., & Chi, Y. (2019). Can short selling activity predict the future returns of non-shortable peer firms? Pacific-Basin Finance Journal, 53, 165–185. https://doi.org/10.1016/j.pacfin.2018.10.007
Lee, K., & Wang, S. (2016). Short-selling with a short wait: Trade- and account-level analyses in Korean stock market. Pacific-Basin Finance Journal, 38, 209–222.
Luoa, J., Nib, X., & Tianc, G. G. (2020). Short selling and corporate tax avoidance: Insights from a financial constraint view. Pacific-Basin Finance Journal, 61, 1-21. https://doi.org/10.1016/j.pacfin.2020.101323
Nia, X., & Yin, S. (2020). The unintended real effects of short selling in an emerging market. Journal of Corporate Finance 64, 1-25. https://doi.org/10.1016/j.jcorpfin.2020.101659
Nigeria Group of Exchange Outlook (2021). Short selling rules of the Nigerian Group Exchange. A publication of Nigeria Group of Exchange. https://ngxgroup.com/ngx-download/short-selling-rules/
Oyedeko, Y. O., Kolawole, O. S., Ibrahim, I., & Zharikova, O. (2023). Risk-return relationship in the Nigerian stock market: Comparative between Fama-French Five-Factor Model and Higher Moment Fama-French Five-Factor Model. Oblìkì fìnansi, 1(99), 68-78. https://doi.org/10.33146/2307-9878-2023-1(99)-68-78
Oyedeko, Y. O., Kolawole, O. S., Samson, R., Voloshyna, O. (2023). Moderating effect of tactical asset allocation on the risk-return relationship in the Nigerian Stock Market. Oblìk ì fìnansi, 2(100), 83-91. https://doi.org/10.33146/2307-9878-2023-2(100)-83-91
Rahim, K. M. S. (2018). Three essays on market efficiency (Doctoral thesis, Nagoya University,Japan). https://nagoya.repo.nii.ac.jp/?action=repositoryuri&item_id25367&file_id=17&fileno=4
S¸ahin, B. C., & Kuz, F. (2021). The effects of short selling on price discovery: A study for Borsa Istanbul. Borsa Istanbul Review, 21(2), 133-138.
Sarpong, P. K. (2017). Trading in chaos: Analysis of active management in a fractal market. (Doctoral Thesis, University of KwaZulu-Natal, South Africa). https://ukzn-dspace.ukzn.ac.za/bitstream/handle/10413/14974/
Wang, J., Lee, J., & Zhao, Y. (2018). Pair-trading profitability and short-selling restriction: Evidence from the Taiwan stock market, International Review of Economics and Finance, 55, 173–184.
Wu, J. J., & Zhang, J. A. (2019). Short selling and market anomalies. Journal of Financial Markets, 46, 1-21. https://doi.org/10.1016/j.finmar.2019.07.001
Ye, Q., Zhou, S., & Zhang, J. (2020). Short-selling, margin-trading, and stock liquidity: Evidence from the Chinese stock markets. International Review of Financial Analysis, 71, 1-15. https://doi.org/10.1016/j.irfa.2020.101549
Zhu, Z., Duan, X., Sun, L., & Tu, J. (2019). Momentum and reversal: The role of short selling. Journal of Economic Dynamics & Control, 104(1), 95–110. https://doi.org/10.1016/j.jedc.2019.05.001
Zubairu M. & Oyedeko, Y. O. (2017). Santa Claus rally and Nigerian stock market return: An illusion or reality? Net Journal of Business Management, 5(1), 1-5.
Alajekwu, U. B., Obialor, M. C., & Okoro, C. O. (2017). Effect of investor sentiment on future returns in the Nigerian stock market. Annals Spiru Haret University Economic Series,2, 103-126. https://doi.org/10.26458/1726
Bello, M. A. (2016). Market reaction and insider trading around the announcements of equity Issues: Evidence from Nigeria. International Journal of Accounting, Finance and Risk Management, 1(1), 25-32. https://doi.org/10.11648/j.ijafrm.20160101.14
Bohl, M. T., Reher, G., & Wilfling, B. (2016). Short selling constraints and stock returns volatility: Empirical evidence from the German stock market. Economic Modelling,58, 159–166. https://doi.org/10.1016/j.econmod.2016.05.025
Cacares, Moreno & Rodrigues, 2015
Chague, F., De-Losso R., & Giovannetti, B. (2019). The short-selling skill of institutions and Individuals. Journal of Banking and Finance, 101, 77–91. https://doi.org/10.1016/j.jbankfin.2019.02.003
Cho, Y., S., & Kwak, Y. (2017). Information contents of short selling restriction and stock lending and borrowing transactions. American Journal of Economics and Business Administration, 9 (2), 27-37. https//doi.org/10.3844/ajebasp.2017.27.37
Deshmukh, S., Gamble, K. J., & Howe, K. M. (2017). Informed short selling around seasoned equity offerings (SEO) announcements. Journal of Corporate Finance, 46, 121–138. https://doi.org/10.1016/j.jcorpfin.2017.05.013
Duchêne, S., Guerci, E., Hanaki, N., & Noussair, C. N. (2019). The effect of short selling and borrowing on market prices and traders’ behavior. Journal of Economic Dynamics and Control, 107, 1-23. https://doi.org/10.1016/j.jedc.2019.103734
Ejem, C. A., Ogbonna, U. G., & Ogbulu, O. M. (2020). Dynamic interactions of Nigerian stock market and macroeconomic variables. Research Journal of Finance and Accounting, 11(8), 33-49. https://doi.org/10.7176/RJFA/11-8-04
Ekundayo, V., Adeoye, A., & Lalude, O. M. (2020). Insider trading under the Nigerian Legal Framework. International Company and Commercial Law Review, 6, 372-380.
Emmanuel, T. A., & Ahmed, A. T. (2020). Effect of investors’ sentiment on stock returns in Nigeria (1990-2017). International Journal of Research in Commerce and Management Studies, 2(1), 21-32.
Evbayiro-Osagie, E. I., & Chijuka, M. I. (2021). Psychological factors and investment decisions in the Nigeria Capital Market. Oradea Journal of Business and Economics, 6(1), 33-41. https://doi.org/10.47535/1991ojbe119
Fama, E., F., & French, K. R. (2015). A five-factor asset pricing model. Journal of Financial Economics, 116, (1), 1-22.
Gbadebo, A. O. & Oyedeko, Y. O. (2021). Economic risk factors and expected return: Evidence from upside and downside market conditions in Nigeria. Theoretical and Empirical Researches in Urban Management, 16(2), 72-88.
Gbadebo, A. O. & Oyedeko, Y. O. (2022). Effect of short selling on risk and return in the Nigerian stock market. Journal of Public Administration, Finance and Law, 26, 99-114. https://doi.org/10.47743/jopafl-2022-26-10
Goyenko, R., & Schultz, P. (2020). Volatility and the cross-section of equity returns: The role of short-selling constraints. http://dx.doi.org/10.2139/ssrn.3567800
Hackney, J., Henry, T. R., & Koski, J. L. (2020). Arbitrage vs. informed short selling: Evidence from convertible bond issuers. Journal of Corporate Finance, 65, 1-22. http://dx.doi.org/10.2139/ssrn.3137226
Hendershott, T., Kozhan, R., & Raman, V. (2019). Short selling and price discovery in Corporate bonds. Journal of Financial and Quantitative Analysis, 1-39. https//doi.org/10.1017/S0022109018001539
Hu, T., & Chi, Y. (2019). Can short selling activity predict the future returns of non-shortable peer firms? Pacific-Basin Finance Journal, 53, 165–185. https://doi.org/10.1016/j.pacfin.2018.10.007
Lee, K., & Wang, S. (2016). Short-selling with a short wait: Trade- and account-level analyses in Korean stock market. Pacific-Basin Finance Journal, 38, 209–222.
Luoa, J., Nib, X., & Tianc, G. G. (2020). Short selling and corporate tax avoidance: Insights from a financial constraint view. Pacific-Basin Finance Journal, 61, 1-21. https://doi.org/10.1016/j.pacfin.2020.101323
Nia, X., & Yin, S. (2020). The unintended real effects of short selling in an emerging market. Journal of Corporate Finance 64, 1-25. https://doi.org/10.1016/j.jcorpfin.2020.101659
Nigeria Group of Exchange Outlook (2021). Short selling rules of the Nigerian Group Exchange. A publication of Nigeria Group of Exchange. https://ngxgroup.com/ngx-download/short-selling-rules/
Oyedeko, Y. O., Kolawole, O. S., Ibrahim, I., & Zharikova, O. (2023). Risk-return relationship in the Nigerian stock market: Comparative between Fama-French Five-Factor Model and Higher Moment Fama-French Five-Factor Model. Oblìkì fìnansi, 1(99), 68-78. https://doi.org/10.33146/2307-9878-2023-1(99)-68-78
Oyedeko, Y. O., Kolawole, O. S., Samson, R., Voloshyna, O. (2023). Moderating effect of tactical asset allocation on the risk-return relationship in the Nigerian Stock Market. Oblìk ì fìnansi, 2(100), 83-91. https://doi.org/10.33146/2307-9878-2023-2(100)-83-91
Rahim, K. M. S. (2018). Three essays on market efficiency (Doctoral thesis, Nagoya University,Japan). https://nagoya.repo.nii.ac.jp/?action=repositoryuri&item_id25367&file_id=17&fileno=4
S¸ahin, B. C., & Kuz, F. (2021). The effects of short selling on price discovery: A study for Borsa Istanbul. Borsa Istanbul Review, 21(2), 133-138.
Sarpong, P. K. (2017). Trading in chaos: Analysis of active management in a fractal market. (Doctoral Thesis, University of KwaZulu-Natal, South Africa). https://ukzn-dspace.ukzn.ac.za/bitstream/handle/10413/14974/
Wang, J., Lee, J., & Zhao, Y. (2018). Pair-trading profitability and short-selling restriction: Evidence from the Taiwan stock market, International Review of Economics and Finance, 55, 173–184.
Wu, J. J., & Zhang, J. A. (2019). Short selling and market anomalies. Journal of Financial Markets, 46, 1-21. https://doi.org/10.1016/j.finmar.2019.07.001
Ye, Q., Zhou, S., & Zhang, J. (2020). Short-selling, margin-trading, and stock liquidity: Evidence from the Chinese stock markets. International Review of Financial Analysis, 71, 1-15. https://doi.org/10.1016/j.irfa.2020.101549
Zhu, Z., Duan, X., Sun, L., & Tu, J. (2019). Momentum and reversal: The role of short selling. Journal of Economic Dynamics & Control, 104(1), 95–110. https://doi.org/10.1016/j.jedc.2019.05.001
Zubairu M. & Oyedeko, Y. O. (2017). Santa Claus rally and Nigerian stock market return: An illusion or reality? Net Journal of Business Management, 5(1), 1-5.
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