Relationship Of Inflation Rate And Returns Of Stock

The relationship between inflation rate and the stock interest rate is closely related to economics participants,so taking a deeper look at the relationship is of great significnace in reality.the overwhelming majority of existing literature study uses linear model for example VAR.However,in real life,economic variables are not linearly related,the actual return of stocks is affected by many factors and under the different levels of inflation,the relationship between inflation rate and the stock interest rate is certainly different.However,the MS-VAR model can simulate and characterize the asymmetry between economic variables and the impact of external shocks better.So,this paper uses MS-VAR,a non-linear model to divide China's inflation into three regional groups,namely,low inflation,moderate inflation and hyperinflation,and then explore the relationship between them in di fferent district groups.Research ideas as:Firstly,this paper reviews the correlation between the historical inflation rate and the stock returns in China,and finds that there is an asymmetric correlation between them when the level of inflation is different,so basing on the analysis,this paper puts three assumptions:respectively represents low inflation and lower stock returnmoderate inflation rate and high stock return?hyperinflation and the lowest stock return rate.And then this paper chooses monthly data from January 1992 to October 2016 as the sample,applies the MSIH(3)-VAR(3)model researches the relationship of the actual stock yield and the inflation rateand testing the three assumptions at the same time.The results show that three assumptions are reasonable,that is to say,during the sample period,China's inflation rate and the actual terurn of stock shows obvious three regional characteristics,eliminating the coexistence of "deflation and bull market" during the second half of 2014.Following,this article uses impulse response function to analyse the response of inflation rate and stock rate resulting from the outside information.The results shows that they change reversely and getting the same conclusion by using the transformation impulse response function to explore the relationship betwwen them when the economy changes.At last,this paper draws related conclusions according to the empirical results and then provides some valuable economic policy recommendations.