The Research On The Relationship Between The Stock Return And Inflation In China

Classical School economist Fisher (1930) proposed the "Fisher effect" shows that the nominal return should be equal to the expected real return plus expected inflation rate, that is, inflation affects the nominal return; if " Fisher effect "holds true, then the nominal return and inflation should be the one to one relationship that the real return will not change systematically with the Inflation rate. The decline of the investors'purchasing power due to inflation will be compensated, in other words, the actual revenue has nothing to do with inflation. Intuitively, stock returns should be positively correlated with inflation, whether expected or unexpected. However, since 1970th , the scholars in western country have done lots research on whether Fisher Effect holds in capital markets well as the relation between inflation rate and stock return. The conclusions are identical: Fisher Effect does not hold in stock market, and there is negative correlation between stock return and inflation rate. However, the result is contrary to traditional theories, which induce many economists to pursue the reason underlying. As consequence, various theories and hypothesis have been presented to explain the results, of which the Tax-Effect Hypothesis, Proxy Hypothesis, Reverse Causality Hypothesis and Variability Hypothesis enjoy profoundly influence. In light of these, there is no verdict on this issue by now.Reviewing related studies both domestic and overseas, this paper builds econometrics model to analyze Fisher Effect and relative hypotheses empirically, using the monthly data from June 2005 to March 2009. It finds out that both real and expected inflation rate relate to stock return negatively, which in turn imply that Fisher Effect does not hold in stock market of China and it is in accordance with the studies composed by western scholars. Among all the theories explaining the negative relation between inflation and stock return, this paper indicates that this article found that "proxy effect" hypothesis, "reverse causality" hypothesis could explain the negative relationship between the stock returns and inflation in our country, but in the test of "volatility" hypothesis,we elicit although the stock returns negatively related to inflation ,but the positive correlation between inflation's volatility and inflation is not very significant, so the "volatility "hypothesis can only partly explain the negative correlatio n between the stock returns and inflation. Finally, after several empirical forward some corresponding policy proposal. results analysis to the negative correlation between stock returns and inflation, we put...