Stock prices, inflation and output: Evidence from wavelet analysis
The negative relationship between real stock return and inflation puzzled many as it contradicts conventional Fisherian wisdom. Fama [Fama, E.F. (1981), "Stock returns, real activity, inflation and money", American Economic Review, 71(September), 545-564.] gave an explanation for this negative relationship with two propositions that links real stock return and inflation through real output. This study revisits Fama's hypothesis for India in the post-liberalized period from a developing country perspective. Examining this relationship on the time-scale decomposition from a wavelet multi-resolution analysis suggests that Fama's hypothesis holds only for the long time scale and remains as a puzzle for the other time scales.
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- Kim, Sangbae & In, Francis, 2005. "The relationship between stock returns and inflation: new evidence from wavelet analysis," Journal of Empirical Finance, Elsevier, vol. 12(3), pages 435-444, June.
- Chatrath, Arjun & Ramchander, Sanjay & Song, Frank, 1996. "Stock prices, inflation and output: Evidence from India," Journal of Asian Economics, Elsevier, vol. 7(2), pages 237-245.
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- Ramsey James B. & Lampart Camille, 1998. "The Decomposition of Economic Relationships by Time Scale Using Wavelets: Expenditure and Income," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 3(1), pages 1-22, April.
- Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September.
- Ramazan Genay & Faruk Seļuk & Brandon Whitcher, 2003. "Systematic risk and timescales," Quantitative Finance, Taylor & Francis Journals, vol. 3(2), pages 108-116.
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