The Impact of Inflation on Stock Market Return: Evidence from China

Stocks are often considered a decent hedge against inflation since they tend to move together. This research article examines the long-term relationship between inflation and stock returns in Chinese markets from 2000 to 2021. The stock price is impacted by the consequences of inflation, and this link between the two has long been a source of worry. Investors must understand how the stock market performs in connection to inflation because they anticipate equity markets to provide protection against inflationary consequences. On the relationship between inflation and stock market performance, many theoretical frameworks provide contradictory results. This research aims to pinpoint the precise impact of inflation on stock market performance. The consumer price index (CPI), which measures inflation in this research, is the independent variable, and the stock index, which measures stock market returns, is the dependent variable. The Auto Regressive Distributed Lag (ARDL) model and its accompanying Error Correction Models are used to calculate the long- and short-run correlations between Chinese stock market returns and inflation. The empirical findings indicate that there is a considerable positive long-run link between market returns and inflation. This means the price of the stock should rise along with the general prices of inflation. The relationship between inflation rate and stock market return has been examined by several financial economists around the world. However, this relationship has not been investigated widely in China.