Evaluating the impact of inflation on stock market in China

This study attempts to investigate the possible relationship between stock price and inflation rate in China over the period of September 1997 to July 2015 using variables of share price index, consumer price index (CPI), interest rate and industrial production. Past studies mainly focus on the developed countries. Despite numerous theories, literature reveals that there is not enough information and investigation about developing countries especially China. This study aims to narrow this gap by examining the relationship between stock and inflation in China. The Vector Error Correction Model (VECM) has been employed to determine the long and short run relationships among the variables respectively. The cointegration test reveals a significant long
run relationship between the underlying variables. Based on the VECM results, inflation is found to have a significant and positive influence on the stock market in the long run as well as in the short run. The Granger causality test also indicates that inflation has a unidirectional causality on the stock market index. In general, the results suggest a positive significant relationship between
inflation and stock price.