Does Stock Returns Protect Investors Against Inflation in Nigeria?

Abstract

Given that one of the major challenges facing investors in Nigeria is high inflation rate, this study investigates whether stock market returns protect investors against inflation. Monthly All-share Index and monthly consumer price index from January 1985 to March 2011 were analysed for evidence of cointegration using the Engle and Granger two steps cointegration model. Results of the cointegration analyses indicate that the stock returns and inflation are cointegrated. Similarly, results of the error correction model suggest that stock returns and inflation converge to long-run equilibrium but the speed of adjustment to equilibrium is slow. The results also suggest that inflation does not have significant short-term effects on stock returns. The study therefore concludes that the Nigerian stock market protects investors’ wealth against inflation in the long-run but not in the short-run.

Key words: Stock Returns, Inflation Rate, Cointegration, Nigerian Stock Exchange.