Empirical Analysis On The Relationship Between The Stock Returns And Its Volatility And Inflation In China

With China’s rapid economic development and capital markets has improved, the stock has become aninvestment tool widely accepted by the masses. So, whether the stock assets can withstand the risk of inflation,and play a role in increasing the value. This problem has been the attention of investors.Traditional "Fisher effect" that the nominal rate of return equal to the real returns and inflation rate.Extend it to the stock market, the nominal stock returns is proportional relationship with the expected inflationrate. However, since the1970s, a large number of empirical studies find “Fisher effect” in the stock market isnot established. On the contrary, a lot of the study results show that the a negative correlation between returnrate in stock market and inflationWhether inflation will affects the stock returns? How it affects? In order to explain these issues, manyeconomists have proposed their own theories and hypothesis, of which the “Variability” Hypothesis,“proxyeffect” hypothesis,“risk premium” hypothesis and “money illusion” hypothesis enjoy profoundly influence,but still there is no unified conclusion. At the same time, these studies most limited to the relationship betweeninflation and stock market returns, less people to further explore the relationship between inflation and stockmarket returns’ volatility.This article will be expanded on the basis of previous studies. Using the daily returns of SSE compositeindex and monthly CPI index from from January1992to December2011as original samples, and calculate themonthly returns, the monthly standard deviation of the daily returns and the monthly inflation rate, which willbe used to measure the returns, the returns’ volatility and inflation. Then the article From empirical perspective,using ADL, Cointegration, VAR, VEC model and other methods to study the relationship between the returnsand its volatility and the inflation rate. Research result shows that: Inflation has a negative impact on the stockmarket returns, and the short-term impact is greater than the long-term effects, changes in the inflation rate isthe returns’ volatility changes Granger cause, there is long-term stable Cointegration relationship betweenthem, and the inflation rate in this balanced relationship is the dominant factor.