The relationship between inflation and stock prices in Zambia

Abstract

— This study examines a relationship between inflation and stock prices for Zambia, over the period 1999–2011, using monthly all share stock prices and inflation rates. The study employed Augmented-Dickey-Fuller and Phillip-Perron for testing the stationarity of the series, Granger-causality test is used to determine the causality relationship between the variables, VAR and Cointegration techniques are employed to determine the short run and long run relationship respectively between the two variables. The unit root test results show that the series are nonstationary at level form but after differentiating they become stationary, the causality test results show a one way causal relationship running from inflation to stock prices and not vice-versa. There was no cointegration found among the variables meaning that there exists only a short run relationship. In general the results support the economic theory which suggests a negative relationship between inflation and stock prices.