Stock Returns, Inflation and the “Reverse Causality†Hypothesis: Evidence from Nigeria

Mercy Ada Anyiwe and Sunday Osahon Igbinedion
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Mercy Ada Anyiwe: Department of Economics and Statistics, University of Benin, Nigeria
Sunday Osahon Igbinedion: Department of Economics and Statistics, University of Benin, Nigeria

International Journal of Research in Business and Social Science (2147-4478), 2015, vol. 4, issue 1, 32-50

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. Key Words:Reverse Causality, Stock Returns, VAR, Nigeria

Date: 2015
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