The Research Of Inflation And China's Stock Returns

In recent years,the international financial market has grown significantly in unstability and the global economy has been experiencing a downturn.In response to this trend,many governments have adopted positive fiscal and monetary policies,which in return increased the volatility of the global currency market and public inflation expectation.With its increasingly globalization,Chinese stock market has also been affected by international macro and micro economic factors and therefore seen notable fluctuation,aggravating the uncertainty of the financial market.There are always different views on whether stock is the best investment against inflation among economists,academic and practitioners,especially when the fact that governments often focus on macroeconomic factors and lack consideration on stock market when applying monetary policy is taken into consideration.These circumstances together have contributed to extensive studies on the relationship between inflation rate and stock returns.This thesis,based on the Money-Illusion hypothesis,examines the Money Illusion effect on Chinese stock market,with a development on the existing CAPM model as well as the Fama-French three-factor model.Specifically,it investigates respectively the effects of expected and unexpected inflation on Chinese stock market return,with all listed companies in A-stock market as objectives,and gives an explanation of the effect of inflation on asset pricing as well as its transmission from the perspective of the irrationality of investors.This research also compares the differences on this influence among different sectors,among companies,and between long-term and shortterm returns,and analyses the Money Illusion effect in Chinese stock market during different inflation cycles.The findings from this study proves that Money Illusion effect does exist in Chinese stock market,and that this effect is mostly contributed by unexpected inflation.Meanwhile,stronger Money Illusion effect in the long-term is shown in the empirical research of this study,which in effect confirms the influence of this effect on the inflation of Chinese stock market during the period of low inflation,while a more significant Money Illusion effect is observed in cyclical industries compared with non-cyclical industries.Finally,it is revealed that the Money Illusion effect helps to explain the complex relationship between inflation and stock returns in China.