An investigation into the mediation effect of inflation to factors that affect total market capitalization in Uganda : a time series analysis

Abstract

Market capitalization serves as a key indicator of financial market performance and economic stability. In Uganda, its growth has been constrained by macroeconomic factors such as GDP, foreign direct investment (FDI), Export Value, Unemployment, Final consumption Expenditure inflation, and savings. However, the mediating role of inflation in this relationship remains underexplored. This study employed time-series data from 1992 to 2023 and utilized the Autoregressive Distributed Lag (ARDL) model, mediation analysis, and error correction modelling to examine both short- and long-term effects. The analysis sought to establish how inflation influenced the relationship between macroeconomic variables and market capitalization in Uganda.Data analysis was done using STATA. The findings revealed that GDP growth (23.99032, 0.008), FDI (4.9651, 0.018), net national savings (4.936724, 0.002) and exports value (2.88e+07, 0.005) had a direct positive impact on total market capitalization, while inflation (-1.25e+09, 0.027), unemployment (-3.44e+08, 0.000) and final consumption expenditure (-.6722415, 0.007) had a direct significant negative effect. Inflation also mediated the relationship between GDP (-4.49E-09, 0.028), FDI (3.79E-09, 0.038) and savings (-1.49E-09, 0.000), weakening their positive impact on market capitalization. In the short run, inflation (-1.36e+08, 0.030) creates volatility, discourages investment and increases borrowing costs, while in the long run, inflation (-6.54E+07, 0.025) erodes investor confidence and reduces capital market participation. The study concluded that inflation was a critical factor influencing Uganda’s financial markets, both directly and as a mediator. I recommend that effective inflation-targeting policies, stronger monetary and fiscal coordination, and capital market reforms including pension reforms are essential to enhance investor confidence and market growth. Policymakers should prioritize financial literacy programs, improve listing requirements, and introduce diversified financial instruments to foster capital market expansion and long-term stability.