Empirical Analysis Of The Fluctuation Spillover Effect Between China Inflation And Stock Market

The relationship between inflation and stock market has been the core questionscholars research in macroeconomics. In2011, PBC took tightened monetary policywith raising interest rate four times and deposit-reserve ratio six times. Subsequently,price fell all the way in China’s stock market. This reflects that inflation and stockmarket interact each other to some extent. Seeing that China inflation pressure increasesand the role stock market play in domestic economy is growing, the paper will researchthe fluctuation relationship between Chinese inflation and stock market.Inflation rate obtained by CPI reflects inflation situation in China and the realreturn ratio obtained by closing price of Shanghai composite index represents stockmarket in this article. First the paper analyze the fluctuation relationship betweeninflation rate and Shanghai index real return using Granger Causality Test, and theresults show that inflation rate affect Shanghai real returns faster than real returns affectinflation rate and inflation rate has a significant long-term memory on Shanghai stockreal return. Next BVGARCH-BEKK model is made for researching the fluctuationrelationship between domestic inflation and stock market, and then Wald Test is madefor parameter estimate. The results show inflation rate sequence and Shanghai indexreal return sequence have no ARCH effect, but have GARCH effect, and theirfluctuation are sustaining, namely the current volatility can affect the future.Furthermore the spillover effect from inflation rate to Shanghai index real return is morethan that from Shanghai index real return to inflation rate. That is to say the spillovereffect between inflation and stock market is asymmetric. So it is given full play thatstock market has the function to forecast economy prospect by the strong shock frominflation to stock market. Then the government can predict the future volatility ofmacroeconomic based on the fluctuation rule and the stage the fluctuation is in to know,so as to make the better monetary, take the corresponding countermeasure onmacroeconomy, suppress the ecomomic volatility moderately and will achieve the goalto prevent oversize fluctuation of inflation and economy.