The Effect of Inflation Rates on Stock Market Returns in Sudan: The Linear Autoregressive Distributed Lag Model

Abstract

This study investigates the effect of the inflation rate in Sudan on stock returns on the Khartoum Stock Exchange. The linear autoregressive distributed lag (ARDL) model was applied to monthly data over the period from September 2003 to December 2019, with the exchange and money supply growth rates, and Murabaha profit margin as control variables. As no previous studies have studied the effect of inflation on stock returns by means of the ARDL approach, this study intends to fill this gap in the current body of literature. The results show that the inflation rate exerts a significantly negative effect on stock returns in both the short and long term, which is crucial to the understanding of all, but especially developing, economies, such as Sudan. First, policymakers must formulate strategies to control inflation and stabilize the stock market; second, any decision-making on short- and long-term investments should take account of these findings.