The effect of inflation on stock returns and affirmation of the Fisherian hypotheses

Abstract

This study basically studies the long-run relationships as well as the dynamic interactions between inflation and stock returns in Kenya. Monthly data from the Nairobi Stock Exchange index and the Consumer Price Index is made use of while our sample period ranges from January 2005 to March 2014. The empirical technique of Autoregressive Distributed Lag (ARDL) bound test proposed by Perasan et al (200 1) was used. The results show that there exists a long-run relationship between stock returns and inflation. The short run dynamic model on the other hand exhibits a moderate speed of convergence to equilibrium implying that there exists •a short-run relationship between stock returns and inflation. This can perhaps be attributed to the instability of stocks evidenced over time.