Stock returns, inflation and economic activity

Abstract

The paper empirically investigates the relations between stock return, inflation and economic activity for Brazilian monthly data (1996-2017). We analyzed the wavelet variance and correlation and estimated regressions at levels of scale. The results do not corroborate the main hypothesis that a negative relation between inflation and economic activity would induce the negative relation between real stock return and inflation. Furthermore, the relation between real stock return and economic activity is not independent of inflation. In terms of scale, cycles of medium and long terms predominate on the inflation and output gap, while in the composition of the industrial production growth rate and the real return of the stock index, the short-term component is the determinant.