The relationship between stock returns and inflation: new evidence from wavelet analysis |
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| Institution: | 1. Department of Applied Statistics, Faculty of Economics & Administration, University of Malaya, 50603, Kuala Lumpur, Malaysia;2. Faculty of Computing and Informatics, Multimedia University, 63100 Cyberjaya, Selangor, Malaysia;3. Department of Econometrics and Business Statistics, Monash University, 900 Dandenong Road, Caulfield East, Victoria 3145, Australia;1. Institute of Finance and College of Economics, Jinan University, Guangzhou 510632, China;2. Economics Depart., Wisconsin University.(Eau Claire), WI 54701, USA;3. International school, Jinan University, Guangzhou 510632, China;4. Business school, University of Edinburgh, Edinburgh EH8 9JS, UK;1. Department of Economic and Financial Analysis, University of Castilla-La Mancha, Plaza de la Universidad 1, 02071 Albacete, Spain;2. Department of Actuarial and Financial Economics, University of Valencia, Avenida Tarongers, s/n 46022 Valencia, Spain;1. CRISIL Global Research & Analytics, Pune, Postal Code: 411057, India;2. Department of Management Studies, National Institute of Technology, M. G. Avenue, Durgapur, Postal Code: 713209, India;3. Symbiosis Institute of Operation Management, Symbiosis International University, Nashik, Postal Code: 422008, India;4. Charlton College of Business, University of Massachusetts Dartmouth, 285 Old Westport Road, North Dartmouth, MA 02747-2300, USA;1. Faculty of Business and Economic Sciences, University of Sfax, Tunisia;2. Higher Institute of Business Administration, University of Sfax, Tunisia |
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| Abstract: | This paper presents a new perspective on the Fisher hypothesis, which states a positive relationship between nominal stock returns and inflation. The new approach is based on a wavelet multiscaling method that decomposes a given time series on a scale-by-scale basis. Empirical results show that there is a positive relationship between stock returns and inflation at the shortest scale (1-month period) and at the longest scale (128-month period), while a negative relationship is shown at the intermediate scales. This indicates that the nominal return results are supportive of the Fisher hypothesis for risky assets in d1 and s7 of the wavelet domain, while the stock returns do not play a role as an inflation hedge at the intermediate scales. The key empirical results show that time-scale decomposition provides a valuable means of testing the Fisher hypothesis, since a number of stock returns and inflation puzzles previously noted in the literature are resolved and explained by the wavelet analysis. |
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