Stock Returns and Inflation : A Wavelet Analysis in Tehran Stock Exchange (TSE)

Investors in stock markets are concerned about the inflation effect on their returns. However, the impact varies based on investment horizons. Since investors have different attitudes and diverse investment horizons, studying the relationship between inflation and stock returns in different time scales would have great implications for them. In this paper, we examine the Fisher hypothesis, which denotes a positive relationship between nominal stock return and inflation rate, using a wavelet multi-scaling method that decomposes a given time series on a scale-by-scale basis. The wavelet approach based on time-scale decomposition provides a valuable means of testing the Fisher hypothesis and resolves the problem of conflicting results in the literature. Our results show a negative relationship between inflation and the TSE returns in short-run horizon and a positive relationship in long-run horizon