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Does inflation have an impact on stock returns and volatility? Evidence from Nigeria and Ghana

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  • Shehu Usman Rano Aliyu

Abstract

This study seeks to apply the Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model to assess the impact of inflation on stock market returns and volatility using monthly time series data from two West African countries, that is, Nigeria and Ghana. In addition, the impact of asymmetric shocks was investigated using the quadratic GARCH model developed by Sentana (1995), in both countries. Results for Nigeria show weak support for the hypothesis which states that bad news exert more adverse effect on stock market volatility than good news of the same magnitude; while a strong opposite case holds for Ghana. Furthermore, inflation rate and its 3-month average were found to have significant effect on stock market volatility in the two countries. Measures employed towards restraining inflation in the two countries, therefore, would certainly reduce stock market volatility, improve stock market returns and boost investor confidence.

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  • Shehu Usman Rano Aliyu, 2012. "Does inflation have an impact on stock returns and volatility? Evidence from Nigeria and Ghana," Applied Financial Economics, Taylor & Francis Journals, vol. 22(6), pages 427-435, March.
    • Handle: RePEc:taf:apfiec:v:22:y:2012:i:6:p:427-435
    DOI: 10.1080/09603107.2011.617691
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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