INFLATION AND STOCK MARKET DYNAMICS: AN ANALYTICAL STUDY

This study analytically examines the relationship between inflation and stock prices of firms listed on the Nigerian Stock Market using data from 1986 to 2014, sourced from the Central Bank of Nigeria and the National Bureau of Statistics. The analysis employed Ordinary Least Squares (OLS), Unit Root (stationarity) tests, Johansen Cointegration, and Granger Causality tests. Results reveal that money supply and exchange rate exhibit statistically significant relationships with stock prices, while all variables except interest rate show a positive relationship with stock prices. No long-run relationship was observed between the endogenous and exogenous variables. Additionally, uni-directional causal relationships were identified from the All Share Price Index to interest rate and from exchange rate to the All Share Price Index. The study recommends broadening Nigeria’s revenue portfolio to reduce market vulnerability to fundamental shocks, reducing interest rates to stimulate stock market investment, deepening the market to accommodate additional investments in response to rising exchange rates and money supply, and implementing policies to channel a portion of capital gains toward reinvestment