Empirical Research On The Relationship Between China’s Inflation Rate And Stock Interest Rate

After the fisher effect theory proposed, it has became the hot research issue for the theories of economy and finance.But in abundant research of the Fisher Effect,there always exist inconsistency between theoretical analysis and empirical test,which are named Fisher effect Paradoxes. Around how to explain the Fisher effect Paradoxes, lots of researches are emerged,but there is still no consistent conclusion about the issue whether the fisher effect theory works or under what kind of situation it works.Under the background of China’s stock market’s development and financial,researching and analyzing the relation between the inflation rate and the stock interest rate has great significance to make macro economy strategy and direct investor’s investment decision.Initially,this article systematically combs the development of the Fisher Effect,sums up the main relative theory of the Fisher Effect Paradoxes,which provide theoretical support for the article’s analysis.Secondly,this article introduces the markov switching model and its estimation method, on the basis of the model estimation,introducing the regime shifts impulse response function’s structure method,which provide the method support for the article’s analysis.This article chooses the data from January 1997 to April 2015, applies the VAR model and MS-VAR model, researches the relationship of the nominal stock interest rate and price level from the start point Fisher effect. The result of the VAR model shows that the inflation rate and the stock interest rate changes in the reversed direction in general. The results of the MSIH-VAR shows that in most of the sample range, the inflation rate and the stock interest rate have positively dependence, in small part of the sample range, the inflation rate and the stock interest rate have negatively dependence. Within the sample period, the relationship between the inflation rate and the stock interest rate has the characteristic of three regimes, the three regimes respectively represents the regime of low inflation rate and low stock interest rate, moderate inflation rate and high stock interest rate, high inflation rate and moderate stock interest rate. The sample quantities included in regime 1, regime 2 and regime 3 successively are 36.2,138.8 and 42, the average duration of the regime 1, regime 2 and regime 3 successively are 15.5,26.7 and 10.6. The economic conditions’probabilities in three regimes are different. The asymmetry exists in the transition probability. In the operation of China’s economy, the phenomenon of sharp shifts within three regimes doesn’t appear. In most of the time, the economy condition is in the second regime, and the self maintenance of regime 2 is stronger. Meanwhile, the results of the impulse response method in regime show that under the shock of the inflation, the inflation rate and the stock interest rate have positive correlation in regime 1, negatively correlation in regime 2 and regime 3; under the impact of the regime transition, the inflation rate and the stock interest rate changes in the inverse direction in the process of regime transaction. The influence to the inflation rate and the stock interest rate of different regimes impact is different.Combined with the actual situation of the inflation rate’s and the stock interest rate’s fluctuation in real economy condition, a conclusion can be made that the regime and regime properties of the relationship between the inflation rate and the stock interest rate, which are identified by MS-VAR model, are coincide with the actual situation in China’s economy development. The results show that the inflation rate and the stock interest rate have negatively correlation with greater probability, the fisher effect theory does not work in Chinese sock market with greater probability. From the macroscopic aspect, the stock market is not the barometer of our country’s macro-economy; from the microcosmic aspect, invest in the stock market is not the effective way to hedging inflation risk.There are three innovation points in this article:(1) Introduce the Markov-switching model to analysis the correlation between the inflation rate and the stock interest rate. Meanwhile, the three regime model, which has higher goodness of fit, is adopted. This model better captures the features of the two variants’relationship. (2) Compared to the results of VAR model and MS-VAR model, the regime characteristic of the relationship of the inflation rate and the stock interest rate is found, and the nonlinear characteristics and exists in the two variants relationship. The inflation rate has asymmetric influence to the stock interest rate. (3) Compared to the traditional impulse response analysis, a new impulse response analysis, which describes the influence to the two variants of the regime transition’s impact, is introduced in this article. The new method captures more abundant features of the two variants correlation, describes the change of the inflation rate and the stock interest rate when regime transition happens. Combined with the actual economy situation of China, the Fisher effect theory paradoxes, such as the Reverse Causality Hypothesis, the Variability Hypothesis and the Monetary Illusion Hypothesis can be applied to explain the phenomenon of the Fisher effect theory failure when regime transition happens.