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Research of the Impact of Expected Inflation on the Stock Returns of China’s Stock Market

Author: TianYanLi
Tutor: XiaoManJun
School: Hunan University
Course: Finance
Keywords: expected inflation stock yield Fisher effect proxy hypothesis
CLC: F822.5;F832.51
Type: Master's thesis
Year: 2009
Downloads: 249
Quote: 0
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Abstract


After years of development, China’s stock market has made remarkable achievements. However, as emerging markets, China’s stock market is still often deviate from the economic situation of the spike. As the stock market in China’s growing influence in the economy, the central bank’s monetary policy how to intervene in the capital market has become a new task of China’s central bank. In order to achieve the purpose of stabilizing capital markets, the central bank’s monetary policy operations need to constantly changing and flexible adjustment of macro-economic situation at home and abroad. It’s particularly important, because from the monetary policy to the right price and output variables such as macroeconomic impact needs to undergo a rather complex chain of transmission, so in general there is an effect of monetary policy lag. This means that monetary policy needs to be forward-looking and taken into account the policy lag, Central bank needs to pay close attention to the public’s expectations of future changes in the macroeconomic forecasts and early response.While the domestic literature on the relationship between stock returns and inflation have accumulated a certain amount of research, but has yet to from the perspective of inflation expectations in-depth study of the relationship between stock returns and inflation. In this paper, starting point of inflation expectations and stock returns theoretical analysis, based on the Fisher Effect and Fama’s "proxy effect" established theoretical model to describe the impact of inflation expectations on stock returns, select 2001 -2,008-year inflation expectations index, non-expected inflation index, the industrial growth rate and stock index through the establishment of co-integration theory based on the VECM model and the model Granger causality test, impulse response function analysis, research the impact of Inflation expected on stock returns. Concludes with the use of inflation expected to intervene and improve the stock market.In this paper, through the VECM model and Granger causality test and impulse response function analysis of empirical studies of the Chinese stock market Fisher hypothesis and the proxy effect hypothesis, the results showed that: There is negatively correlated relationship between actual stock returns and inflation expectation ,unexpected inflation ,Fisher effect does not exist; stock returns and real economic activity is positively related , the relationship between stock returns and inflation expectations and the non-inflationary expansion is negative, the proxy effect hypothesis of China’s stock market exist; Granger causality tests show that there is cointegration relationship between actual stock returns and inflation expectation in China’s stock market, but there is no causal relationship on statistical sense . Impulse response function shows that inflation expectations can contribute to the stock market did in the early growth, but as time goes on, its catalytic role will become smaller, eventually leading to decline in the stock market rate of return.By empirical research, this paper think that the central bank should strengthen the management of inflation expectation ,and using inflation expectation to intervene in the stock market, improve the financial sustainability of the capacity to support economic development, safeguard the financial system is healthy and stable operation. Other social institutions can take advantage of inflation expectation to develop its stock market to raise the stock market "wealth effect" and China’s stock market pricing efficiency and improve stock market regulation.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Financial market
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