The generalized Fisher effect has attracted a great deal of controversy around the world. This is similar in the Nigerian scenario as study established that there exist no long-run relationship between stock returns and inflation while some studies reported that only a unidirectional causation of returns on stocks with money flow exist as the variation in the flow of money will alter returns on stocks significantly, but not in the opposite direction. Therefore, this study examined the relationship between stock returns, inflation and interest rate in Nigeria with objective of testing the Fisherian theory. The Fisherian theory of interest postulates that changes in the value of money would be reflected in nominal interest rates and stock returns in the same proportion over the long-run. This study tested the validity of this hypothesis in a small open economy, Nigeria. A battery of econometric techniques were employed (descriptive and inferential) for the sake of robustness. In line with the theoretical postulation of the Fisherian theory of interest, the findings established a long-run relationship among the selected series. Specifically, the study found that the price level coefficient exhibits a positive and significant relationship with stock price in the long-run. Therefore, evidence abounds of a great deal of the Fisherian postulation in the analyses carried out and conclude that common stocks are, indeed, a good hedge against inflation in Nigeria.
Key words: Fisherian theory, interest rates, Nigeria, small open economy, stock returns.
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