This paper investigates empirically the effects of inflation on aggregate stock prices in Nigeria during the period of 1980-2012. Annual time series data on Stock Prices (ASP) and inflationary pressure measure were sourced from the Central Bank of Nigeria Statistical bulletin and Nigeria Stock Exchange Fact book. Employing the Engle-Granger and Johansen-Joselius method of co-integration in a Vector Error Correction Model (VECM) setting, in addition to Granger causality Test, Argumented Dickey Fuller Test (ADF) was employed. The empirical results shows that there exist a long run equilibrium negative and significantly relationship between inflation rate and aggregate stock prices, Broad money supply (M2) has a negative and significantly effects on aggregates stock prices, Narrow Money Supply (M1) shows a positive and significantly effects on aggregates stock prices while Average inflation rate show a positive and significantly relationship between aggregate stock prices. The results also show a strong relationship with an R2 of 0.886 representing 89.6% variations in the explanatory variables. However, the direction of causality between the money supply measures and aggregate stock prices is mixed. We recommend for the strengthening of monetary policy objective of price stability for the purpose of achieving efficiency in performance of the stock prices quoted in the Nigerian Stock Exchange (NSE).
Keywords: Aggregate Stock Prices, Co-integration, Inflation Rate, Unit Root Causality Tests
