Economics Research

Investigating The Relationship between Stock Market Returns and Inflation in Different Time Scales in Tehran Stock Exchange using Wavelet transform

Document Type : Research Paper

Authors

reza tehani 1
Shapur Mohammadi 1
Arash Mohamadalizadeh 2

1 Assistant Professor, Management Department, University of Tehran

2 Ph.D. Student in Financial Management, Management Department, University of Tehran

Abstract
This paper presents a new perspective on the Fisher hypothesis, which states a
positiverelationship between nominal stock returns and inflation. The new approach
is based on a waveletmultiscaling method that decomposes a given time series on
a scale-by-scale basis. The time series of inflation and stock return are
decomposed into three wavelet details and one wavelet smooth. Empirical results
show that there is a positive relationship between stock returns and inflation at 2month
period and at 8-month period, while a negative relationship is shown 4-month period. Also,no
 significant relationship was revealed in one month time horizon.
This indicates that the nominal return results are supportive of the Fisher hypothesis for risky
Assets in d2 and s3 of the wavelet domain, while the stock returns do not play a role as an inflation hedge at one month and four month timescales.

Keywords

Stock Returns
Inflation
Wavelet Analysis
Correlation
Fisher Hypothesis

  • Receive Date 19 May 2009
  • Revise Date 08 November 2009
  • Accept Date 31 January 2010

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