The Relationship between Inflation and Stock Market Performance in Jordan

Abstract

The purpose of this study is to investigate the relationship between inflation rate and stock market performance in Jordan through Unit root test, co-integration test and finally error correction model in the time period between 1978 and 2015. This study is one of the first studies to show the relationship between inflation rate measured by GDP deflator and the stock market performance reflected by trading value.The study finds that the variables are non-stationary at their level and they become stationary in their first difference. There are two co-integration equations showing the long run relationship between variables. There is short and long run relationship as indicated by the statistically significant coefficient in the error correction model. Also based on impulse response we find that any positive shock in trading value makes an increase in GDP deflator. On the other hand a positive shock of (GDP deflator) does not create an important impact on trading value..

Keywords: Trading value, VECM, GDP deflator, Granger, Co-integration, Jordan, Impulse response, ASE.