Inflation and Stock Market Return: Estimated Model from Nigeria

This study examined the effect of inflation on stock market return in Nigeria. Time series data were sourced from Central Bank of Nigeria Statistical Bulletin from 1990-2023. Stock market return was modeled as the function of real inflation rate, nominal inflation rate, average inflation rate and target inflation rate. The study employed multiple regression models to estimate the relationship that exists between inflation and stock market return. Ordinary Least Square (OLS), Augmented Dickey Fuller Test, Johansen Co-integration test, normalized co-integrating equations, parsimonious vector error correction model and pair-wise causality tests were used to conduct the investigations and analysis. The study found that 89.5 and 74.9 variation in stock market return in Nigeria was explained by variation in inflation rate. Furthermore, the regression result revealed that real inflation rate have negative and significant effect, nominal inflation rate have positive and significant effect, average inflation rate have negative but no significant effect while target inflation rate have negative but no significant effect on the stock market return in Nigeria. From the findings the study conclude that inflation have significant effect on stock market return. We recommend the need for proper coordination among different governmental economic policy making institutions is vital. Inflation target in Nigeria should not only aim to combating inflation but also should have to consider the economic position of the country. Central Bank of Nigeria which is responsible for the monetary policy of the country should aim to keep inflation below ten percent to enhance stock market return.