Modelling the Impact of Inflation on Stock Market Returns and Volatility: Evidence from Sudan Suliman Zakaria Suliman Abdalla Assistant Professor, Department of Quantitative Analysis, College of Business Administration, King Saud University (Saudi Arabia). E-mail:Sulimanzakaria9@yahoo.com, sulabdalla@ksu.edu.sa Tel.:+966560847037; Fax: +9664678648 Abstract This paper investigates the impact of inflation on stock market returns and volatility using monthly observations of inflation rate and general stock market index for Sudan over the period of September 2003 to July 2012. The empirical analysis of the paper is carried out by means of the Generalized Autoregressive Conditional Heteroscedastic (GARCH) methodology including both symmetric and asymmetric models. Based on AR-GARCH (1,1) and AR(1)-EGARCH(1,1), the results show that there is a negative effect of inflation rate on both the conditional mean and conditional variance equations representing the monthly stock market returns. The results of the asymmetric GARCH models of the paper have important implications for investors in the Khartoum stock market. They should look at the returns volatility (as a proxy for risk) revealed by the inflation rate when structuring portfolios and diversification strategies.