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.
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- Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September.
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