Stock Returns, Inflation and the “Reverse Causality” Hypothesis

Abstract

This paper attempts to empirically examine the Reverse Causality hypothesis within the Nigerian context during the period 1980 – 2011. Employing Vector Error Correction Methodology (VECM), causality was found between inflation and government stocks, with causality running from government stocks to inflation, thus providing evidence in support of the reverse causality hypothesis. The results from the forecast error variance decomposition (FEVD) and impulse response functions tend to further lend credence to this finding. Accordingly, this study suggests, in part, the need for a tight monetary policy which would help to reduce inflation and stock prices, as such measures would leave the individuals with less money to buy stocks. Such efforts should be complemented by augmenting domestic production and encouraging investment through inexpensive bank finance. 

Keywords: {'name': 'Reverse Causality'}, {'name': 'Stock Returns'}, {'name': 'VAR'}, {'name': 'Nigeria'}

Authors & affiliations

Mercy Ada Anyiwe
Affiliation not supplied

Sunday Osahon Igbinedion
Affiliation not supplied

Deposited references

Supplied references, not a list of publications citing this article.

DOI: 10.1016/0378-4266(89)90032-0

DOI: 10.1016/S0014-2921(98)00090-7

DOI: 10.1111/j.1540-6261.1976.tb01899.x

Bruno, B.C. and Paulo, R.S.T. (2011). The Stock Returns-Inflation Causality Revisited: Analyzing the Evidences for 31 Developed and Emerging Countries’ Retrieved from: www.anpecsul2011.ufsc.br/?go=download & path on 13/2/2014.

DOI: 10.1080/00036849300000032

Cohen, J.B., Zinbarg, E.D. and Zeikel, A. (1987). Investment Analysis and Portfolio Management, 5th Edition (Homewood, IL: R.D. Irwin Co., 1987).

DOI: 10.1111/j.1540-6261.1974.tb01489.x

DOI: 10.1080/096031097333619

Dutt, S. and Ghosh, D. (1996). The Export Growth-Economic Growth Nexus: A Causality Analysis. Journal of Developing Areas 30, pp. 167-181.

DOI: 10.1016/S0164-0704(06)80008-X

Fama, E.F. (1981). Stock Returns, Real Activity, Inflation and Money. American Economic Review 71: pp. 545-565.

DOI: 10.3386/w0403

Fisher, I. (1930). The Theory of Interest. New York: Macmillan.

DOI: 10.1111/j.1540-6261.1983.tb03623.x

DOI: 10.1016/0165-1889(88)90055-3

Granger, C.W.J. and Newbold, P. (1977). The Time Series Approach to Econometric Model Building. In: C.A. Sims, New Methods in Business Cycle Research: Proceedings from a Conference, Federal Reserve Bank of Minneapolis.

DOI: 10.1111/j.1540-6261.1985.tb02389.x

DOI: 10.1111/j.1540-6261.1976.tb01898.x

DOI: 10.1016/0165-1889(88)90041-3

DOI: 10.1111/j.1468-0084.1990.mp52002003.x

DOI: 10.1016/j.econlet.2011.07.003

DOI: 10.1111/j.1540-6261.1992.tb04673.x

DOI: 10.1111/j.1540-6288.1990.tb00795.x

DOI: 10.1108/03074350610657454

DOI: 10.1111/j.1540-6261.1976.tb01900.x

Okuyan, H.A. (2013). Real Macroeconomic Variables and Stock Prices: Evidence from Turkey. Asian Journal of Empirical Research, Vol. 3, No 6, pp. 654-662.

Osaze, B.E. (2007). Capital Markets – Africa and Global Town. The Bookhouse Company, Nigeria.

DOI: 10.1016/j.econlet.2012.04.024

DOI: 10.1111/j.1540-6288.2000.tb01414.x

Reilly, F.K. and Dyl, E.A. (1975). Inflation and Portfolio Management: A Test of an Operational Investment Policy During Periods of Inflation. University of Illinois Faculty Working Paper No. 264, pp. 3-15. Retrieved from: www.archive.org/details/inflationportfol264reil

DOI: 10.1111/j.1540-6261.1977.tb03306.x

DOI: 10.1016/j.econmod.2011.12.017

Smart, D.J.C. (2005). The Inflation-Stock Price/Return Relationship. Lecture Notes FEW 7149 Interest Rates and Stock Markets’ Retrieved from: www.albany.edu/faculty/faugere.pdf.

DOI: 10.1111/j.1540-6261.1983.tb03624.x

Strongin, S. and Petsch, M. (1997). Protecting a Portfolio Against Inflation Risk. Investment Policy Vol.1, No.1, pp. 63-81.