Investigating the Impact of Inflation on the Returns of Botswana’s Equity Market

Abstract

In this paper, we investigate the impact of inflation on Botswana’s equity returns. The study tests whether Fama’s (1981) proxy hypothesis holds in the context of Botswana. Using a Vector Autoregressive estimation approach, we undertake several statistical tests to validate data and generate results to investigate the underpinning hypothesis. The results show that inflation negatively impacts stock market returns in the long run. These findings carry important implications for investors, stock market analysts, scholars and policy makers and they contribute immensely to the pool of knowledge about the transmission mechanisms between the equity market and the macro economy in Botswana.