The Relationship between stock returns and the rate of inflation

A Research project submitted in partial fulfillment of the requirements for the degree of Bachelor of Business Science in Actuarial Science at Strathmore UniversityThe purpose of the study is to investigate the relationship between stock returns and the rate of inflation in the Kenyan market using monthly time series data between January 20 I 0 and October 2017. The study uses the Unit Root test, Granger Causality test, Johansen's co-integrated test and the Vector Enor Connection Model (VECM). The Granger Causality test reveal that returns Granger Cause inflation although the result is inconsistent with the economic theory. However, the Johansen's test of co-integration show that there exists at most one co-integrating and the co-integration estimate reveals that returns have a significant relationship with inflation in the long run in Kenya. The VECM model reveals that in the short-run, inflation and returns have a significant positive relationship. Similarly, in the long-run, the study finds that returns and inflation have positive relationship. The study gives insights to investors that they can use stocks to hedge against inflation since inflation and returns are co-integrated in the long-run with a positive relationshi