Journal of Economics and Finance

, Volume 43, Issue 1, pp 73–90 | Cite as

The impact of inflation rate on stock market returns: evidence from Kenya

  • Donald A. OtienoEmail author
  • Rose W. Ngugi
  • Peter W. Muriu


This study examined the stochastic properties of inflation rate, stock market returns and their cointegrating residuals using monthly data for the period 1993 to 2015. The Autoregressive Fractionally Integrated Moving Average (ARFIMA)-based exact maximum likelihood estimation was employed to determine the integration orders of the individual variables as well as the cointegrating residuals. Results from the ARFIMA model indicate that the month-on-month inflation rate, year-on-year inflation rate and stock market returns have non-integer orders of integration. This is inconsistent with the stationary/nonstationary results often obtained from the conventional unit root tests and implies that any shocks to the variables are highly persistent but eventually disappear. The results also reveal that the cointegrating residuals have non-integer orders of integration, suggesting that deviations from the long run equilibrium are prolonged, contrary to the assumption held under the conventional cointegration framework. The Fractionally Integrated Error Correction Model (FIECM) reveals that the year-on-year inflation rate positively granger causes stock market returns. This supports Fisher Effect and implies that stock market returns in Kenya provide shelter against inflationary pressures. This is the first study to empirically examine fractional cointegration and ARFIMA-based Granger Causality between inflation rate and stock market returns in Kenya.


Stock returns Inflation rate ARFIMA models 

JEL Classifications

C13 E44 G12 


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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  • Donald A. Otieno
    • 1
    Email author
  • Rose W. Ngugi
    • 1
  • Peter W. Muriu
    • 1
  1. 1.School of EconomicsUniversity of NairobiNairobiKenya

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