Stock prices, inflation and output: Evidence from wavelet analysis

S. Raja Sethu Durai and Saumitra Bhaduri

Economic Modelling, 2009, vol. 26, issue 5, 1089-1092

Abstract: 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.

Keywords: Fisher; hypothesis; Stock; return; Inflation; Real; activity; Wavelets (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (24)

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