The Correlation Between Real Return Of Stock And Inflation

The correlation between real return of stocks and inflation rate has been a hot topic in theoretical research, but it's also controversial because the researchers can't get coincidence with each other.In this paper, by employing the structural vector autoregressive model to study the impact of the macroeconomic shocks, including demand shocks and supply shocks, on stock returns and inflation rate, the author found that supply shocks led to negative correlation between real return of stock and inflation rate, while demand shocks led to positive correlation between real return of stocks and inflation rate in China. The actual relationship between real return of stocks and inflation rate depended on the comparison of demand shocks and supply shocks. After that the author studied the correlation between stock returns and inflation rate by using the autoregressive distributed lag model, and found that in general there is a negative correlation between real return of stock and inflation rate. At the same time, the author investigated the threshold effect of inflation rate by using threshold regression model, and found that there are some differences between the correlation in inflation regime and that in deflation regime. Finally the author examined the dynamic correlation by using state-space model, and drew the conclusion that there is a positive correlation prior to 1998, but a negative one after that.