Empirical Study Of The Impact Of China's Capital Market Inflation

In the modern economy society, inflation has become a very common phenomenon, and its socio-economic impact is always of concern, while the relationship of inflation and the capital market has always been a hot issue of finance. Whether the capital market can play an important role in preserving and increasing expectations of investors? They are the focuses on which researchers and investors in China's capital markets. Therefore, this article focuses on empirical research how the rate of inflation takes impact on capital market.According to Western theories, the starting point of what they studied is the test of Fisher Effect, which was expected to consider the expected nominal returns of assets should equal to the expected real return plus expected inflation. Before 1970, Western economists generally thought that stock was a good inflation hedge commodity, and there was a positive correlation between the nominal stock returns and inflation rate. This view is consistent with Fisher in 1930 on the hypothesis that real interest rate is independent of the inflation rate. Some financial economists believe that stock returns and actual inflation should be positively correlated, because the stock on behalf of the tangible or real assets of ownership. Because rising money supply will cause inflation, currency will be devaluated, then investors will take measures to use hedge instruments, and currency will put into stock market, and stock returns should also be increased, so the stock can be used as a possible hedge means against unexpected inflation.However, after 20th 70's, many researchers conduced studies on the relationship between the returns of stock and the inflation rate by using empirical test on different countries, different periods or different stocks, and they drew four conclusions: positive correlation, negative correlation, uncertainty (i.e. correlation with the passage of time changes), and irrelevant. A large number of empirical research results show that: the real rate of returns of the stock and inflation rate have significant negative correlations. The above-mentioned differences between theoretical and empirical test have been described as the paradox between the relationships of stock returns and inflation rate. The researchers then put forward the hypothesis of a variety of theories attempts to explain this phenomenon, such as Risk Premium hypothesis, the Tax Effect Hypothesis, the Money Illusion Hypothesis, and the Proxy Hypothesis, but they do not form a unified view.In China, the capital market developed late, Shanghai & Shenzhen stock exchange were estabilished on year 1990 & year 1991 respectively. However, some researchers also studied the relationship between the real stock returns of financial assets and the inflation, but these studies was not systematical, and most of the literatures are in view of real stock returns, while few of them focus on the effects of inflation on fix-incom securities market. Especially, these are few literatures which aimed to explain how the stock market performs at different inflation periods. So far, there is not a convincing empirical test to prove the relationship.This paper deals with the effects of inflation on the capital market in theory research and practice. It has both theoretical depth and practical value. This article will first impact on inflation to start to explore the rate of return of stock market. Secondly, the capital market is much more than just the stock market; it should also include the increasing growth of fixed-income security market. Equity and fixed income securities impact each other, the relationship between inflation and fixed income securities will affect the demand for the shares, and then affect the returns of the stock market. Thirdly, specific to the actual applications, this paper specifically examine the impact of inflation on the differentiation of the industry.This paper is divided into four sections, including six chapters. This article uses a combination of normative and empirical research methods, following guidance from theory to practice at first and then to complement the theoretical study related ideas. Overall, this article is based on the theory of how inflation affect the capital market, and focuses on the impact of inflation on the Chinese stock market and fixed-income bond market from a macro-perspective, studies on the impact of inflation to various industries from a practical point of view, then obtained some inherent relationship between the inflation and the industry differentiation.This paper has the following major innovations: Firstly, previous literatures studied only from the perspectives of how inflation affects the rate of return of stock market; the study of fixed-income bonds is rarely involved. This article examines the effect of inflation on the capital market rather than the impact of the stock market, as far as possible in order to realize a comprehensive analysis on how inflation affects the capital market.Secondly, in the stock market the investors usually pay much attention to the risk-return relationship and the price-trading volume relationship. The trading volume may play an important role when we measure the influence of the inflation on the stock return. The analysis about China's stock market in pervious literatures often missed this point. Therefore, in this paper, in order to measure the effect of inflation on return of stock market more accurately, we involve in trading volume, using Linear Regression and Granger Causality Tests to analyze the relationship among inflation, return of stock and trading volume, and provide proofs of this relationship, Different from other studies, this paper considers the influence of the trading volume on the inflation-return relationship.Thirdly, there are few studies analyze the influence of the inflation volatility on the stock return. This paper employed a class of ARCH models and fit the behavior of the inflation. Further empirical study show that the volatility of the inflation is negatively related to the stock return in Shanghai stock market and positively related to the stock return in Shenzhen stock market, Therefore, there are some differences between the effects of inflation on Shanghai stock market and Shenzhen stock market.Fourthly, whether in theory or practice industry sector, study on how the inflation affects fixed-income securities is rare, and in view of that fixed-income securities and equity securities pricing has big difference in pricing model, so the results of these studies do not give too much to learn. This paper uses Error Correction Model (ECM) to analyze the impact of inflation on fixed-income securities. Besides the research methods, the study itself is innovative, final measurement result is more in line with reality.Fifthly, the paper combines theory with practice to explore the differentiation of the impact on inflation to the industry. In the analysis activities of stock market investment, test to industry plates is one important part of asset allocation, and specific research and analysis to how inflation affects the differentiation of industry can provide effective guidance for practice.