The impact of inflation on stock market returns and volatility: Evidence from Nairobi securitiesExchange

Abstract

The linkage between stock prices and inflation has been subjected to extensive research in the past decades and has aroused the interests of academics, researchers, practitioners and policy makers globally. This study examined the impact of inflation on stock market return and volatility in the Nairobi Securities Exchange (NSE). Previous research findings have established the existence of a negative relationship between a stock prices and inflation. These findings contradict the hypothesis by Fisher (1930) who argued that stock prices should be positively related with expected inflation, providing a hedge against inflation. A correlational research design was employed to establish whether inflation is associated with stock market return and volatility. Specifically, it sought to answer the question on the effect of inflation on the stock return and volatility in the NSE. Monthly time series data on NSE 20 share index and Consumer Price Index, for the period July 2000 to August 2012 was used in this research. The OLS estimation technique was employed to estimate a single equation relationship with the stock return as the dependent variable and explanatory variable as inflation.