Studies On The Relationship Between The Stock Return And The Inflation Rate In China's Economy

Stock return-inflation relations are still economists'interest field. As stock market becomes better and better, a great amount of stock investors come into the market. Can real stock return be a good hedge against inflation and become investors'value-keeping and value-increasing tool? This paper uses several econometrical models and methods to analyze stock return-inflation relations, and then provides important related information for investors and policy-makers.The structure of the paper is arranged as follows: in the first part of the paper, we introduce the background, purpose, content and structure arrangement of the paper. The first stock market was built in December 1990, a few scholars make research on stock return-inflation relations in our country, western scholars started to study this problem from fisher effect, their empirical results demonstrate that fisher effect is right before 1970, but there is a contradiction between stock return-inflation relations after1970. So many economists try to explain the reason of the contradiction, for example proxy hypothesis theory and variability hypothesis theory. The paper will solve three main problems: is fisher effect right? Can proxy hypothesis theory and variability hypothesis theory explain our country's contradiction between stock return-inflation relations; can fisher effect not exist in a short time or a long time?In the chapter 2 of the paper, it introduces basic theories and related our country and foreign countries'research papers. Firstly, it illustrates fisher effect, including its origin, development and the procedure of developing it to equation of stock return-inflation relations; secondly, it introduces proxy hypothesis theory and variability hypothesis theory and related foreign countries'research papers; lastly, it concludes our country's research papers of stock return-inflation relations. In the chapter 3 of the paper, it introduces models and methods of measuring and examining stock return-inflation relations as well as making data explanations for variables. Firstly, we introduce the testing methods by which differentiate stationary series and unit root test, i.e., ADF testing method. Secondly, we introduce the H-P filter and ARIMA model which are used to divide inflation to expected inflation and unexpected inflation. Thirdly, co-integration theory is introduced, we can use Johansen trace test to determine co-integration relation of time series and choose the best co-integration relation. The co-integration testing is used to determine the long-run equilibrium relationship between two or more variables. Fourthly, we introduced the Granger causality testing to determine the casual relationship between the two series. Although the Granger testing causality can not only give us the information of which one determines the other, but it also tells us the level of explanation between the two variables. Fifthly, we introduced the General Autoregressive Conditional Heteroscedasticity Model:GARCH model, which describe the variance of the dependant variables. GARCH model is made up of a mean equation and a variance equation. The mean equation is as follows:This equation is used to describe the data producing process. And the conditional variance equation is:By using the past realized volatility information and the already modified information, the conditional variance in GARCH model can describe the data producing process with both stationary and volatile property.Lastly, we introduce Space State Model, varied coefficient model describing stock return-inflation relations can be written in space state model form, and then use Kalman Filter to estimate it. For three variables: inflation, stock return and rate of production growth which we use in the paper, we make data explanations, then make graph illustrations, after that make unit root test for three variables which precedes the following empirical research.In the chapter 4, we test the relationship between inflation and stock returns in our country by using the models and methods introduced in the chapter 3. This chapter is the most important part of the paper.At first, we examine fisher effect theory, we express the fisher effect using the following equations:We divide inflation into expected inflation and unexpected inflation using two methods: H-P filer and ARIMA. If the coefficientβ=0 orβ1 =β2 = 0, fisher effect is right which indicates that the real stock return is not influenced by expected and unexpected inflation. The empirical results demonstrate: stock return and inflation is negative related, so there is a contradiction of stock return and inflation relations in our country.To explain this contradiction, we examine proxy hypothesis theory and variability hypothesis theory.First of all, we test proxy hypothesis theory which can be expressed in such way:If the sum of coefficientsα1 +α2 +αk is negative and the sum of coefficientsβ1 +β2 +βk is positive, Fama's proxy hypothesis can explain the contradiction of stock return-inflation relations.The last model uses two step Least Squares Regression method,εt represents the inflation variable that is purged of the relationship between inflation and real activity. If coefficientβ1 = 0, proxy hypothesis theory proves right in our country.The empirical results are as follows: we find there is a long-run equilibrium relationship between inflation and stock return and they are positive related according to co-integration test; we also find that the relation between stock return and the rate of production growth is negative both in a short time and in a long time. In the last model,β1 is significantly not zero, this proves that there is a direct causality between inflation and stock return. So Fama's proxy hypothesis theory can't explain the contradiction of stock return-inflation relations, but this empirical result conforms to Mundell-Tobin theory.Secondly, we examine variability hypothesis theory, we use GARCH model to express inflation, conditional heteroskedasticity series: ht 2 represents variability of inflation, and then estimate the following two equations:If coefficientβ1 +β2 + +βi is obviously positive andα1 +α2 + +αi is significantly negative, variability hypothesis theory can explain our country's contradiction of stock return-inflation relations. Our empirical results support variability hypothesis theory.After that, we found varied coefficient model to express the relationship between inflation and stock return. Through observing the dynamic time road to examine stock return-inflation relations, we find that about 76.6% of 16 year from February 1991 to December 2006, the relationship between real stock return and inflation is negative, but just 23.4% of 16 years, the relationship between real stock return and inflation is positive, this means that the negative relationship between stock return and inflation is stable.In the last chapter of the paper, we give the empirical results of our studies and provide some policy advices.