Inflation Dynamics and Returns on Equity: The Nigerian Experience

Inflation in a developing economy is a dynamic force that shapes equity investment decisions. Equity being a variable income security has the potential of hedging inflation. This study examines inflation dynamism and equity returns using monthly data sourced from the various volumes of Central Bank of Nigeria (CBN) Statistical bulletin and Nigerian Stock Exchange (NSE) daily official list for a period of thirty- six months. The study utilizes the unrestricted vector autoregressive (UVAR) mechanism to examine the nature of the relationship between inflation and rate of return on equity. It was observed that inflation rises faster than rate of return on equity; and the nature of the relationship between inflation and return is found to be inconsistent over time. Furthermore, there are no causal effects between past inflationary rates and rate of return; though such effect is evident between current rates of inflation and immediate previous stock returns. Thus, the study recommends that Nigerian government should attempt to synchronise its monetary and fiscal policies in order to achieve stability in the economy. Also private sector productivity should be enhanced to reduce inflation and make returns on equity more attractive.