Does the inflation rate affect the performance of the stock market ...

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M. Omran, J. Pointon Emerging Markets Reiew 2 2001 263279
In conclusion, the results indicated that the inflation rate has a significant
impact on the market activity in Egypt as all the five variables indicated a
significant negative long-run relationship. As well, the inflation rate seems to have
a significant short-run relationship with all market activity variables except for the
number of traded companies. In all cases, the overall fit of the selected inflation
rate models of market activity was good with R 2 ranging from 0.57 to 0.82.
Therefore, the hypothesis, which stated that the market activity increases as the
inflation rate decreases, cannot be rejected, implying a negative relationship
between the variables.
6.2. Modeling the impact of the inflation rate upon market liquidity through error
correction models
Since the results from the ADF unit root tests indicated that the inflation rate
and the market liquidity variables were shown to be integrated of the same order,
that is, these variables are integrated of order 1, static long-run regressions were
performed using ordinary least squares Ž OLS .. The outputs of this analysis are
given in Table 4, which summarizes the results of this test.
The residuals from the static long-run equations as described in Table 4 were
integrated of order zero, suggesting that the variables in each bivariate relationship
are co-integrated, that is, there is a long-run relationship between these variables,
which is negative as identified in the regressions. However, EC models can
represent the co-integration relationship between the variables explaining both a
long- and short-run relationship simultaneously. Table 5 shows the final model for
each lag.
The inflation rate models, which targeted market liquidity as the dependent
variable, contain significant ECMs at the 1% level.
The inflation rate model of the relationship with the total value traded to market
capitalization confirmed a co-integration relationship between the variables as the
ECM was significant with a lag of 1 for the differenced autoregressive variable and
a lag of 3 for the differenced inflation rate. However, the coefficient of the
Table 4
Static long-run models for the impact of the inflation rate upon market liquidity variables
2
Variables Coefficient S.E. t-Prob. F-Prob. R
y Constant 1.4716 0.36802 0.0010
6,t
Inflation 7.7040 1.8454 0.0007 0.0007 0.52
y Constant 1.6273 0.20597 0.0000
7,t
Inflation 8.8736 1.0328 0.0000 0.0000 0.822
Notes: y total value traded to market capitalization; and y volume of shares traded to volume
6 7
of shares listed.