A Study Of The Relationship Between Real Rate Of Return And Inflation

As the main form of capital market, the stock market is an important component of the national economy. More and more people invest to stock market. So, investor want to know whether stock returns is a good hedge against inflation.According to the Fisher effect, the nominal rate of return is a sum of a real return plus the expected inflation rate. Thus, the stock returns should move systematically with the expected inflation rate.the study period covers January 1991 to may 2005. Empirical analysis indicate that the real stock returns and inflation is negative relation to some extent. Fisher effect is not exist in Chinese stock market. Investor of stock have lose for inflation. Other studies of home and abroad also found the negative relation of stock return and inflation.Numerous studies have attempted to explain this relation. The purpose of this thesis is to examine whether the Variability Hypothesis can be used to explain the negative relationship between Chinese stock renturns and inflation. According to Variability Hypothesis, a rise in inflation generates greater uncertainty which , in turn, depresses stock returns. This effect could operate through several mechanisms. Greater uncertainty generated by higher inflation could also lead to an increased risk premium being added to the discount rate, lowering the discounted present value of expceted future cash flows. Again, this would lead to a decline in the current level of stock prices. For this , Variability Hypothesis can explain the negative relationship between Chinese stock renturns and inflation.In study, We give a ADF test to data. We proxy inflation variability by the conditional variance of inflation generated by GARCH model, and to test the relation of the stock returns and variability, of variability and inflation. The result is that, in our country, real stock returns and variability is negtive relation, variability and inflation is positive relation. Therefore, the Variability Hypothesis can be used to explain the negative relationship between Chinese stock renturns and inflation.