Inflation, Stock Returns And Monetary Policy

The interaction between stock returns, inflation and monetary policy is an area that has interested monetary and financial economists for a long time. Monetary economists have tended to focus on the question whether monetary policy has any effect on stock returns. Financial economists, on the other hand, have been more interested in the question of whether stock returns is a good hedge against inflation.This dissertation focuses on the relation between inflation, stock returns and monetary policy. It aims to basically answer the relation between inflation and stock returns. Then it explicates the relation. Finally this dissertation agues the monetary and stock price volatility on the basis of above results.This dissertation follows the following procedures:First the negative relation of inflation and stock returns is found through the single equation re-examination of Fisher effect. Secondly, through the structural stability test of the relation and the analysis of the role of monetary and output, the negative correlation of inflation and stock returns is mainly influenced by the change of monetary policy, the monetary policy play a important role on the negative relation of stock returns. Thirdly, a five variable VAR and a bivariate SVAR provide a further evidence of the negative relation and the role of monetary policy. Finally, based on the empirical results analyzed above, this dissertation argues and attempt to answer the question of whether monetary authority should pay attention to and respond the change of stock price.This dissertation consists of five chapters.Chapter One is a literature review of inflation, stock returns and the role of monetary policy. The survey of this area both in China and abroad not only provides insight for us in the previous researches and the latest products, but also provides the theoretical foundation for the empirical study later in the dissertation.Chapter Two investigates the data of Chinese stock market and monetary market. It discusses the development and features of Chinese stock market. Then it introduces the calculation of stock returns and the definition used by the dissertation. It also explicates the data of monetary policy variable and output variable. Finally, it analyzes the time series properties of these data, which functions as econometric base of later empirical analysis of time series.Chapter Three provide a empirical analysis on the relation between inflation and stock returns. The main findings are: (1) Taken Fisher effect of stock market as a starting line, thechapter analyses the relation between stock returns and inflation, and the relation between stock returns and expected inflation as well as unexpected inflation. Simple single equation estimation shows that the Fisher effect is not exist in Chinese stock market, stock returns and inflation is negative relation to some extent. Besides, the change of expected inflation has a significant negative effect on the change of expected stock returns. However the change of unexpected inflation doesn't significant negative effect on the change of expected stock returns. (2) To illustrate the negative correlation, we classify our sample into two sub periods: before and after 1996 through structural stability test. In examining the relation between inflation, real activity, money supply and stock returns in terms of two sub periods, the dissertation shows that the change of inflation has no long term stable relation with money supply. Furthermore, the change of expected output does not correlation significantly with expected stock returns. All theses indicate Fama's 'proxy hypothesis' cannot be used to explain the relation of inflation and stock returns. The negative relation is mainly caused by money supply. In the first sub sample, inflation has strong negative effect on stock returns. (3) Inflation and money supply affect stock returns asymmetrically.Chapter Four provides further evidence on the negative correlation between inflation and stock return through application of VAR and...