IMPACT OF INFLATION ON STOCK MARKET PERFORMANCE: A VECTOR AUTOREGRESSION APPROACH

This study investigates the relationship between the inflation, as measured by Consumer Price Index (CPI), and the Nepalese stock market index, exploring both short-term and long-term dynamics. Using econometric tools such as the Vector Autoregressive (VAR) model and Johansen co-integration tests, including time series data, the study examines whether inflation has a significant impact on stock market performance in Nepal. The results reveal that there is no long-term relationship between CPI and the stock market index. It suggests that inflation does not lead to a sustained equilibrium or long-run connection with stock market performance. However, a significant short-term relationship is found, where higher inflation has a weak negative impact on the stock market index, indicating that rising inflation can pressure stock prices in the immediate term. Additionally, Granger causality tests show no clear causal direction between CPI and stock market movements, suggesting that while the two variables may move together in the short run, their relationship does not follow a direct cause-and-effect pattern. The study provides valuable insights for policymakers and investors, suggesting that a comprehensive approach addressing multiple economic factors is essential for stabilizing the stock market. Further research is recommended to explore additional variables and extend the analysis over a longer period to gain a deeper understanding of these dynamics.