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Modelling the Volatility of Banks Interest Rate Returns in Nigeria: A Comparison of the Efficacy of Different GARCH Models

Authors:
Moujieke Bridget Lotachi, Zorle Dum Deebom

Addresses:
Department of Mathematics, Rivers State University, Port Harcourt, Rivers State, Nigeria. Department of Mathematics, Rivers State Universal Basic Education Board, Port Harcourt, Rivers State, Nigeria.

Abstract:

This study examines the modelling of volatility in Nigeria's interest rate returns, comparing various GARCH models. The data used in the study were extracted from the Central Bank of Nigeria’s (CBN) online statistical database on deposit bank interest rates. Both first- and second-order GARCH models were fitted to the data using EViews version 10. The results indicated that the second-order TGARCH (2,2) model provided the best fit for the data. Model selection was based on the Akaike Information Criterion (AIC), and model diagnostics were conducted using the ARCH effect test, QQ-plot, and serial correlation test to ensure robustness. The study's findings revealed a higher probability of gains than losses for individuals who obtained loans from banks during the study period. However, the variables analysed in this study exhibited extreme volatility, which suggests that users of interest rates were exposed to considerable risks. This means that bankers, customers of deposit money banks, and investors should expect rewards for holding such a risky asset. It was concluded that ARCH-GARCH models not only estimate expected returns on interest rates but also assess investors' reactions to risk, as revealed in the leverage effects captured in the second-order TGARCH (2,2) model, which was provided as the best fit for the data. Based on these findings, the study recommends further investigation into the volatility of interest rates.

Keywords: Interest Rate; Central Bank of Nigeria’s (CBN); Akaike Information Criterion (AIC); Extreme Volatility; Leverage Effects; Decision-Making; ARCH-GARCH; Financial Stability; Risk Management.

Received on: 25/11/2024, Revised on: 20/02/2025, Accepted on: 12/04/2025, Published on: 09/09/2025

DOI: 10.69888/FTSTPL.2025.000446

FMDB Transactions on Sustainable Technoprise Letters, 2025 Vol. 3 No. 3, Pages: 127-138

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