Impact of Inflation and Interest Rate on Stock Return

Abstract

The research undertaken analyses short run influence of inflation and interest
rate on stock returns in Pakistan. Inflation was represented by “CPI”, interest
rate by “I” and stock return by “KSE100”. Monthly data comprised of 45
observations from 1 July 2005 to 1 April 2009 was taken. Simple and Multiple
regression models have been used for the estimation of coefficients. The
empirical results show that there is significant relationship between the stock
price interest rates and inflation. Moreover inflation is negatively related with
stock prices while interest rate is positively related with the stock prices. So it can
be concluded that in short- run the impact of inflation on stock returns is negative
while positive in case of interest rate.