THE IMPACT OF INFLATION ON STOCK MARKET PERFORMANCE AT THE NIGERIAN STOCK EXCHANGE 1986-2006
ABSTRACT
The study examined specifically the impact of inflation on stock market performance at the Nigerian Stock Exchange. The study used time series data for 21 year period; 1986-2006, to fill this important research gap. The least square regression approach was used to estimate the necessary models. The regression results showed that coefficient of inflation rate does not have significant negative impact in explaining the long run performance of the stock market performance indicators tested. The result as well showed that the coefficient of inflation rate was negative, implying that, though theoretically inflation did not have significant negative impact on stock market performance indicators on the surface, but intrinsically considering the time value of money, inflation actually depreciated the real worth of the market indicators. In view of the above the following recommendations were made towards measures that can be used by the government for achievement of low and predictable inflation in Nigeria. The measures are as follows: Adoption of balanced budget by the government; Import substitution and encouragement of domestic production; Enhancement of food production through extension of credit facilities to agricultural sector as well as construction of silos for storage of excess produce in order to avoid hoarding or scarcity of food items; Prevention of sharp practices through sound management of the exchange rate of the naira; Implementation of measures to mope up excess liquidity in the system that result from upward review of workers salary; Earnest pursuance of stable macro-economic environment devoid of political turbulence and instability; Granting of total autonomy to the Central Bank in the formulation and implementation of monetary policies; and encouragement of massive industrialization for improved industrial output in order to facilitate appreciation of the naira in the international market.