| The relationship between inflation rate and asset return has been the hot study issue of macroeconomics and financial economics. Foreign scholars have done a great deal of research on this issue, and most of them focus on the relationship between inflation rate and stock market returns. However there has no consistent conclusion about the relationship. Therefore, many hypotheses like Fisher Effect, Deputy Hypothesis and Volatility Hypothesis are used to explain the conclusions. In recent years, there are many domestic empirical researches about Chinese stock market returns and inflation rate, mainly using ARIMA and VAR, but still have no consistent conclusion. In this paper, the author combines the regime switching of inflation rate and stock market returns, using Markov Regime Switching Model which Hamilton(1989) put forward, and obtains some empirical facts about Chinese inflation rate and stock market returns.Based on the monthly data from 1991 to 2011, the author uses the mature econometric method which Hamilton(1989) firstly brought forward in financial economics. In this article, the author puts emphasis on coefficient's significance and robustness, and observes high robust and reliable conclusion. In the sample period, inflation rate and real stock market returns have occurred highly significant state transition, each state duration and changing time are consistent with reality. Investors forecasted future inflation level according to pre-inflation rate, and the development of inflation maintained a period of time because of inertia. Real stock market return rate has positive correlation with market risk. The result of MRS-VAR regression shows that inflation rate and real stock market returns are negatively correlated, not consistent with Fisher Effect. Through analyzing the volatility of inflation rate, it indicates that Volatility Hypothesis could explain the negative correlation between inflation rate and real stock market returns. |
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