Study On The Relationship Between The A-Share Returns And The Inflation Rate In China

In recent years, with the background of economic system reform deepening and industrial structure transforming and upgrading constantly in our country, the relationship between the return of the domestic stock market and inflation has been getting more and more close attention from domestic and foreign academia and financial industry. Clarifying the relationship between the two is of great significance in rolling out effective policies by the state management, planning wise investment strategies by the investors, formulating reasonable development strategies by the entrepreneurs, optimizing family financial structures by the residents and so forth. Meanwhile, it is also the key point which can unblock the transmission mechanisms between the capital market and the real economy.On the basis of summarizing domestic and foreign relevant literatures detailedly and orderly, the mainstream theories of the modern western economics about the relationship between share market and inflation are comprehensively discussed in this paper. The monthly empirical data from January1997to September2013in our country are employed in the empirical analysis of the relationship between Chinese A-share market return and inflation from the perspective of correlation and interactive transmission. The article exert a model of dynamic weight on Shanghai A-share index and Shenzhen A-share index to measure Chinese A-share market return, and we apply the change rate of CPI to indicate inflation in this paper.Based on the correlation perspective, the Fisher effect hypothesis, the proxy effect hypothesis and the volatility effect hypothesis are tested empirically in order, then the robustness analysis is employed according to the corresponding conclusions. Firstly, the research shows that regardless of actual inflation、expected or unexpected inflation, all of them have a significant negative correlation with the A-share real return. In terms of the expected inflation, the negative effect on the A-share real return from unexpected inflation is stronger and more significant. Therefore, the Fisher effect does not exist in Chinese A-share market, and the conclusion is robust. Secondly, the study suggests that there is a positive correlation between inflation and the level of real economic activity, and there is a negative correlation between the level of real economic activity and the A-share real return. Moreover, there is also a significant negative correlation between the A-share return and inflation on which the influence of real economic activity is eliminated. All of the above conclusions run counter to the opinions of the proxy effect hypothesis. That is to say, the proxy effect hypothesis does not have explanatory power in our economy. In addition, the conclusion is still valid in contingent monetary policy system, which indicates that the conclusion is robust. Thirdly, a higher inflation rate will increase the volatility of its own, and the increase of inflation volatility will reduce the A-share real return, but the later does not have statistical significance. Combining with the robustness analysis on the period of high inflation, the research shows that the volatility effect hypothesis does exist in our economy, but it does not have robustness.In the interactive transmission chapter, the interactive Granger causalities between the A-share nominal return and the actual inflation、expected and unexpected inflation are tested empirically. Through the comparative analysis of the impulse response function graphs and the variance decomposition graphs of the two types VAR model, we analyze the interactive transmission effect between the A-share nominal return and inflation with econometrical models. The A-share nominal return is not the Granger cause of unexpected inflation, and it is also not the Granger cause of the actual inflation, which indicates that although the A-share nominal return is the Granger cause of the expected inflation, it is not necessarily the Granger cause of the actual inflation. On the other hand, the expected inflation is not the Granger cause of the A-share nominal return, but the unexpected inflation is the Granger cause of the A-share nominal return, meaning that the way leading to the phenomenon that the actual inflation becomes the Granger cause of the A-share nominal return may be the unexpected inflation. According to the impulse response function graphs, both the actual inflation and the unexpected inflation have the negative accumulated shock effect on the A-share nominal return. In terms of the actual inflation, the unexpected inflation has a more powerful shock effect on the A-share nominal return, and it works for a longer valid time. On the other hand, the A-share nominal return has a positive accumulated shock effect on both the unexpected inflation and the actual inflation. In terms of the unexpected inflation, the A-share nominal return has a more powerful shock effect on the actual inflation, but it works for a shorter valid time. According to the variance decomposition graphs, both the shock effect of the actual inflation and the unexpected inflation make a low contribution to the variation of the A-share nominal return. However, the A-share nominal return makes a relative high contribution to the variation of both the actual inflation and the unexpected inflation. Thus, there is a kind of significant asymmetric interactive transmission effect between the A-share nominal return and inflation.After summarizing main conclusions of the above empirical analysis, then combining with the Chinese actual situation, we put forward several useful recommendations and creative regulatory notions from the perspective of national management to promote the effectiveness of various policies. Finally, the article concludes with the limitations of this paper and outlook for further research.