The document examines the relationship between stock market returns, inflation, and real economic activity in India. It analyzes two hypotheses: the Fisher hypothesis about nominal stock returns and expected inflation, and the "proxy effect" hypothesis about macroeconomic relationships. The study uses an ARIMA model to test expectations and finds support for the Fisher hypothesis. Regression analyses show inflation is negatively linked to current and future real activity, while stock returns positively correlate with current activity alone. The results contrast previous findings for developed economies.

1. Presented by-
Yasha singh
4113007007

2. • Relationship between Stock Market Returns, Inflationary
Trends and real activity as it pertains to the Indian economy
• Investing in developing countries – taking stakes in their
growth prospects
• The study examines fishers hypothesis and find results to be
contingent upon the proxy employed for measuring
expected inflation.
• Inflation is found to be a significant determinant of stock
returns even after controlling for current and future activity.

3. • Two hypothesis Examined :
• The Fisher Hypothesis nominal Stock returns and inflationary
expectations.
• The “proxy effect” hypothesis Fundamental macro economic
relation that characterize the economy.
• ARIMA (Autoregressive integrated moving average)
an autoregressive integrated moving average
(ARIMA) model is a generalization of an autoregressive moving
average (ARMA) model.

4. • These models are fitted to time series data either to better
understand the data or to predict future points in the series.
• ARIMA- based expectation model support the Fisher
hypothesis and the commonly held belief that common
stocks are a hedge against expected inflation.
• The results also show that inflation is negatively linked to
both current and future real activity.

5. • Monthly stock returns are derived from the continuous
compounding of the daily closing prices of the BSENI.
• Period : April 1984 to December 1992.
• Data from PTI Stock scan Service, Bombay.
• Reasons: Equally weighted index of 100 stocks.

6. • Express the relationship in joint hypothesis:
• Stock markets are efficient.
• Nominal return = expected real return + expected inflation rate
• Rt = α + βE(πt / Øt-1)+еt
• Rt – nominal return on market portfolio , π t – inflation rate
• E is expectations operator and Øt – information set available to
investor.
• If B=1 Asset or Portfolio is a perfect hedge against expected
inflation.

7. • Real returns and expected inflation rate vary independent of
each other. This extension involves decomposing of inflation
rate into an expected and unexpected component.
• Rt = α + β1E(π t / Øt-1)+β2[(π t –E(πt/ Øt-1)]+nt’
• unexpected component=Realized inflation rate and
expected inflation rate.
• Regression of real Stock returns on current and future real
Activity.
• (Rt- Πt)= α + βΣTt+I

8. • Regression of inflation on current and future real activity.
• Πt= α + βΣTt+I
• Regression of real stock returns on inflationary expectations
and current and future real activity.
• (Rt- Πt)=α + β1E(Π)+ β2(Πt- E(Πt))+ β3ΣTt+i

9. • After examining two inter-related economic issues with
respect to the Indian stock market
• Fisher “There is a contingency on proxy employed in
measuring inflationary expectations”.
• ARIMA “Stock holding offer a hedge against expected
inflation

10. • It is contrary to oft-documented negative relationship
between stock return and inflation in Developed economies
• Real stock returns are significantly positively related to
current real activity alone.