Impact of Inflation on Stock Market Returns: An Evidence from Banking Stocks of Nairobi Securities Exchange, Kenya
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Date
2025-04
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AESS Publications
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Inflation significantly influences economic stability and investor confidence, potentially impacting stock market returns. Understanding this relationship is crucial for investors and policymakers, particularly in emerging markets like Kenya, where economic fluctuations are common. This study aimed to investigate the complex interplay between various inflation types and stock market performance within the Kenyan banking sector. Specifically, the study sought to determine the effects of imported inflation, demand-pull, cost-push, and inflation targeting on the stock market returns of commercial banks listed on the Nairobi Securities Exchange (NSE) from 2017 to 2022. The research was guided by the Fisher Hypothesis, Inflation Illusion Hypothesis, Proxy Hypothesis, and Interest Rate Parity Theory. A descriptive study design was employed, utilizing a census survey to collect data from all 11 banking sector firms listed on the NSE. Secondary data on stock market returns were sourced from the NSE and CBK, while inflation data was obtained from the KNBS. Quarterly data over five years were analyzed using SPSS version 21. Findings revealed that hyper-inflation, imported, cost-push, and demand-pull inflations had significant positive effects on stock market returns, while inflation targeting had a moderating effect. The study concluded that demand-pull inflation could lead to higher corporate earnings, while cost-push inflation could increase interest rates as the CBK attempts to control inflation. Imported inflation raised costs for firms relying on imported inputs, reducing profitability. Hyperinflation led to rising stock prices as investors sought to protect their wealth. Successful inflation targeting by central banks resulted in lower interest rates, boosting stock returns. The study recommended that the CBK could use interest rate adjustments to control inflationary pressures. Companies listed on the NSE could implement cost-control measures to mitigate cost-push inflation, while the government could impose tariffs to limit imported inflation. Additionally, diversification was suggested as a strategy for managing hyperinflation's impact on stock returns. The CBK was advised to use monetary policy tools such as interest rates and reserve requirements to regulate inflation and enhance financial stability.
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Judith Kanini Mwiwa, Ambrose Jagongo. Impact of Inflation on Stock Market Returns: An Evidence from Banking Stocks of Nairobi Securities Exchange, Kenya. Asian Journal of Economics, Finance and Management , 2025, 7 (1), pp.214-227. ⟨10.56557/ajefm/2025/v7i1268⟩. ⟨hal-05039248⟩