Impact of Inflation on Stock Return and Investment Risk

Purpose : The study's objective is to assess the dynamic impact of inflation (INFLATION) shocks on Egyptian Exchange 30 Index (EGX30) returns and volatility (risk). \n Method : Specifically, the study uses January 2015 until October 2025, and reports on a total of 130 monthly observations. For EGX30 returns a simple percentage change method is used and for inflation represents the monthly percentage change in the borrower Consumer Price Index (CPI). The investigator used two econometric methods, with the Vector Autoregression (VAR) model in combination with the Generalized Impulse Response Function (IRF) to assess the dynamic short to medium term impact of inflation on EGX30 returns, as well as testing the direct impact of inflation on market volatility (risk) using the Generalized Autoregressive Conditional Heteroskedasticity GARCH(1,1) model. \n Results : The empirical evidence provides three significant conclusions. First, the IRF evidence suggest that inflation shocks show a positive and statistically significant impact on EGX30 returns in the medium-run (around Month 5 is the peak impact), indicating that Egyptian stocks can offer a partial hedge against inflation in the medium-run. Second, the GARCH mean equation provided evidence that the overall long-run impact of inflation on average return is negative and statistically significant, supporting the Proxy Hypothesis. Third, and importantly, inflation shocks had no statistically significant direct impact on market volatility (risk). Instead, the relatively high persistence of market volatility is influenced primarily by internal market dynamics (e.g., ARCH and GARCH effects). \n Originality / relevance : The study contributes to understanding how inflation dynamics interact with stock market performance in Egypt, highlighting both the hedging potential of equities in the medium run and the persistence of volatility driven by internal market forces.