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Stock prices, inflation and output: Evidence from wavelet analysis


  • Durai, S. Raja Sethu
  • Bhaduri, Saumitra N.


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.

Suggested Citation

  • Durai, S. Raja Sethu & Bhaduri, Saumitra N., 2009. "Stock prices, inflation and output: Evidence from wavelet analysis," Economic Modelling, Elsevier, vol. 26(5), pages 1089-1092, September.
  • Handle: RePEc:eee:ecmode:v:26:y:2009:i:5:p:1089-1092

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    References listed on IDEAS

    1. 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.
    2. Ram, Rati & Spencer, David E, 1983. "Stock Returns, Real Activity, Inflation, and Money: Comment," American Economic Review, American Economic Association, vol. 73(3), pages 463-470, June.
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    4. Arjun Chatrath & Sanjay Ramchander & Frank Song, 1997. "Stock prices, inflation and output: evidence from India," Applied Financial Economics, Taylor & Francis Journals, vol. 7(4), pages 439-445.
    5. Ramazan Genay & Faruk Seļuk & Brandon Whitcher, 2003. "Systematic risk and timescales," Quantitative Finance, Taylor & Francis Journals, vol. 3(2), pages 108-116.
    6. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-565, September.
    7. 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.
    8. Ramsey, James B. & Lampart, Camille, 1998. "Decomposition Of Economic Relationships By Timescale Using Wavelets," Macroeconomic Dynamics, Cambridge University Press, vol. 2(01), pages 49-71, March.
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    2. repec:mes:emfitr:v:52:y:2016:i:3:p:574-588 is not listed on IDEAS
    3. Farouk, Faizal & Masih, Mansur, 2016. "Are there profit (returns) in Shariah-compliant exchange traded funds? The multiscale propensity," Research in International Business and Finance, Elsevier, vol. 38(C), pages 360-375.
    4. Xiao, Wei-Lin & Zhang, Wei-Guo & Yao, Zheng & Wang, Xiao-Hui, 2013. "The impact of issuing warrant and debt on behavior of the firm's stock," Economic Modelling, Elsevier, vol. 31(C), pages 635-641.
    5. Alin Marius Andrieş & Iulian Ihnatov & Aviral Kumar Tiwari, 2016. "Comovement of Exchange Rates: A Wavelet Analysis," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(3), pages 574-588, March.
    6. Rahul Deora & Duc Khuong Nguyen, 2014. "Time-scale comovement between the Indian and world stock markets," Working Papers 2014-242, Department of Research, Ipag Business School.
    7. Tiwari, Aviral Kumar & Dar, Arif Billah & Bhanja, Niyati & Arouri, Mohamed & Teulon, Frédéric, 2015. "Stock returns and inflation in Pakistan," Economic Modelling, Elsevier, vol. 47(C), pages 23-31.
    8. Andrieș, Alin Marius & Ihnatov, Iulian & Tiwari, Aviral Kumar, 2014. "Analyzing time–frequency relationship between interest rate, stock price and exchange rate through continuous wavelet," Economic Modelling, Elsevier, vol. 41(C), pages 227-238.
    9. Khalfaoui Rabeh, K & Boutahar Mohamed, B, 2011. "A time-scale analysis of systematic risk: wavelet-based approach," MPRA Paper 31938, University Library of Munich, Germany.
    10. repec:ipg:wpaper:2014-412 is not listed on IDEAS
    11. In, Francis & Kim, Sangbae & Gençay, Ramazan, 2011. "Investment horizon effect on asset allocation between value and growth strategies," Economic Modelling, Elsevier, vol. 28(4), pages 1489-1497, July.
    12. Atilla Cifter, 2015. "Stock Returns, Inflation, and Real Activity in Developing Countries: A Markov-Switching Approach," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 62(1), pages 55-76, March.
    13. Mensi, Walid & Hammoudeh, Shawkat & Tiwari, Aviral Kumar, 2016. "New evidence on hedges and safe havens for Gulf stock markets using the wavelet-based quantile," Emerging Markets Review, Elsevier, vol. 28(C), pages 155-183.


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