Heterogeneous Financial Expectations, Market Microstructure, and Price Formation on the Nigerian Exchange Group

Price formation in equity markets is determined by the interaction of heterogeneous investor beliefs, trading strategies, and information processing capabilities, mediated by the market microstructure within which transactions occur. This study develops a heterogeneous agent model of stock price formation for the Nigerian Exchange Group and tests its predictions using high-frequency trade and order book data. The theoretical contribution is an agent-based model of market microstructure that incorporates four investor types: fundamental value investors, technical trend followers, noise traders, and informed institutional traders, whose interaction generates empirically testable price dynamics, volatility clustering, and fat-tailed return distributions consistent with observed Nigerian market properties. The model is calibrated using the method of simulated moments to match key stylised facts of the Nigerian Exchange Group including autocorrelation structure, kurtosis, and trading volume patterns. The empirical application uses proprietary minute-level trade data and order book depth data from the Nigerian Exchange Group covering 2021 to 2023, analysed using price discovery models, adverse selection components of the bid-ask spread, and intraday volatility patterns. A structural break analysis evaluates how the introduction of the Exchange's electronic trading platform upgrades and the 2022 market access policy changes altered microstructure properties. The theoretical framework draws on noise trader theory, the rational expectations equilibrium model, and the market microstructure literature. The PhD-level contribution lies in the original theoretical model, the novel use of high-frequency data for the Nigerian market, and the calibration methodology that bridges agent-based and econometric approaches. Findings carry implications for the Nigerian Exchange Group's market design choices, the Securities and Exchange Commission's market manipulation surveillance, and practitioners using algorithmic trading strategies. Keywords: market microstructure, price formation, heterogeneous agents, Nigerian Exchange Group, high-frequency data