Research On The Empirical Relationship Between Stock Market Rate Of Return&Sector Rate Of Return And Inflation In China

This paper aims to examine whether the stock market can avoid the inflation risk in China through empirical research. The author, on the basis of the theories and methods from domestic and foreign scholars, using monthly data from January2006to August2011, which is after the reform of non-tradable shares, have done an empirical test of the relationship between the two, with the vector autoregressive model. The study not only examines the relationship between the Shanghai Composite Index rate of return, which represent the level of market yield, and inflation; also selected12key sector indices to investigate the relationships between the various sectors of the rate of return and inflation. The results showed that the market rate of return and most of the major sector rates of return showing an inverse relationship or no significant correlation with the level of inflation. This means that in the Chinese stock market, the vast majority of categories of investment goods do not have the ability to hedge against inflation risk. In the index rates of return of all visits, only three sector rates of return had a short-term positive correlation with inflation, showing the abilities to hedge against inflation risk.The study also found that the relationship between the market rate of return&the all12major sectors rate of return and the real economy variables is not obvious. Chinese stock market’s macroeconomic barometer function is still not significant. The synchronization of the stock market and real economy is still poor.In addition, the main way of the conduction of China’s monetary policy to the stock market is money supply. The stock market (except the real estate sector) is not sensitive to interest rate fluctuations. The main relationship between market rate of return and monetary policy is positive, but also showed some repeats according to the policy’s continuity. However, by the sectors perspective, only three sectors are similar with it. And two sectors’rates of return showed mainly inverse relationship with monetary policy. Other sectors’ response to monetary policy is not significant.