An Analysis of the Effect of Inflation on Stock Prices in Nigeria: Evidence from Lagos Stock Market
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Background of the Study
Inflation is a critical macroeconomic factor that influences financial markets, particularly stock prices. In Nigeria, inflation rates have been volatile, often driven by exchange rate fluctuations, rising energy costs, and supply chain disruptions (CBN, 2024). Such volatility directly impacts investor sentiment and the valuation of stocks on the Lagos Stock Market, the country’s premier trading platform.
The relationship between inflation and stock prices has been a subject of extensive economic discourse, with conflicting theories. While some argue that stocks act as a hedge against inflation, others highlight the adverse effects of rising prices on corporate profitability and investor returns. Nigeria’s economic environment provides a unique context to analyze this dynamic, given its inflationary trends and evolving capital market.
This study examines the effect of inflation on stock prices in Nigeria, providing insights into how inflationary pressures influence investor behavior and stock market performance.
Statement of the Problem
Despite the theoretical link between inflation and stock prices, empirical evidence from Nigeria remains inconsistent. Investors often face uncertainty in predicting stock performance during inflationary periods, leading to suboptimal decision-making. Furthermore, policymakers lack sufficient data on how inflation impacts market dynamics, hindering the development of strategies to stabilize the market.
Existing studies on this topic often adopt a broad macroeconomic approach without focusing on specific stock markets, such as the Lagos Stock Market. This study aims to bridge this gap by analyzing the localized effects of inflation on stock prices.
Objectives of the Study
- To analyze the relationship between inflation and stock price volatility in the Lagos Stock Market.
- To evaluate the impact of inflation on investor confidence and market performance.
- To identify strategies for mitigating inflation-induced stock price volatility.
Research Questions
- What is the relationship between inflation and stock price volatility in the Lagos Stock Market?
- How does inflation affect investor confidence and market performance?
- What strategies can mitigate the impact of inflation on stock prices?
Research Hypotheses
- Inflation does not significantly influence stock price volatility in the Lagos Stock Market.
- Investor confidence and market performance are not significantly affected by inflation.
- Strategies for mitigating inflation do not significantly reduce stock price volatility.
Scope and Limitations of the Study
The study focuses on the Lagos Stock Market, analyzing the impact of inflation on stock prices from 2015 to 2025. Limitations include data availability and the difficulty in isolating inflation’s effects from other macroeconomic factors.
Definitions of Terms
- Inflation: The sustained increase in the general price level of goods and services in an economy over time.
- Stock Prices: The market value of a company’s shares traded on a stock exchange.
- Volatility: The degree of variation in the price of a financial instrument over time.
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